Huntington Beach, CA We often receive inquiries from clients looking for an asset based loan for working capital for their business. A common mistake that traps many business owners from obtaining the capital they need to grow is taking on the wrong form of debt.
The number 1 killer of business is taking on an asset based term loan when they should be utilizing and asset based line of credit. We have seen countless times how companies strap themselves with term debt when their capital needs are really short term. Let me explain. If you were in need a $50,000 asset based loan to cover the cost of a purchase order you would not want to borrow the money on a fixed monthly payment plan. Why? FINANCE 101 never use long term debt to cover short term expenses.
Purchase order financing is a revolving need. You receive one purchase order, fulfill it, receive another and so forth. Taking out an asset based loan on a term basis straps the cash flow of the company making it difficult to pay the debt back in a lump sum.
There are predatory lenders out there that will sell you a term loan under the auspices that it is working capital when in fact it is actually term debt. Further, making matters even more difficult, is they will take their payments automatically from your checking account on a daily or weekly basis. This makes cash flow strapped even further and forces the business owner to take out another loan and the cycle repeats. The sales people at these companies are only interested in their commission on the loan and most have never run a business for themselves.
On the contrary, a revolving asset based business loan provides you with the revolving credit you need to allow you to borrow the money when you need it and pay it down through the normal course of the business cycle. How? Let us use the previous example of a $50,000 asset based purchase order loan. The asset is the purchase order. A promise to pay from a credit worthy customer for goods or services your company is providing. If your cost to fulfill the purchase order is $50,000 and your sale price for the sake of round numbers is $100,000, you can pay the loan back entirely upon receipt of payment from the customer. Once the $100,000 is paid by the customer, $50,000 of that payment goes to pay down the loan amount and the borrowing process repeats.
Why can we not do the same thing with a term loan? There are a couple of reasons for this. First, term loans often come with pre-payment penalties over the first two years. You can not pay them off without paying an extra fee in the first two years of the agreement. This is not ideal for short term asset based loan needs. Secondly, term loan lenders will file what is known as a UCC-1 blanket lien on the company making it impossible for another lender to provide financing until the debt is paid off. This second requirement is a major road block.
There is an exception to the rule however, but it does not favor the business owner. Some term loan asset based lenders will allow additional debt. This means that you can have more than one term loan. The problem with this is as the term debt is stacked up, your monthly payment obligations increase. Lenders measure your ability to pay by the amount of income the company has after all other debts are paid. There comes a point where the company can not take on any more debt and borrows its way out of business.
What is the solution? There are two many scenarios and variables within each to discuss here. The moral of the story is to apply the right type of financing to the right needs. This is not always easy to determine. Especially, when you have a persistent sales person telling you that his term loan is what you need for your business. Let Huntington Coast Capital manage your asset based loan decisions for you. Our unbiased consultation will give you the honest truth about which type of financing is right for you. We have a unique advantage over the lenders out there and that is simply that we are not lending our own money. Our objective is not to sell our product, but to consult with you to determine which is best for your business.
Do not trust a salesperson trying to hit a quota! We align ourselves on your side of the table and have your best interest in mind. In need of an asset based loan? Do not make the decision without contacting us first.
To your success!
Patrick Zazueta – 714-719-8966
Managing Director, Huntington Coast Capital, Inc.