The Myth Of Inventory Finance Companies

Your company carries it. You need to finance it. We’re of course talking about inventory. Discussions with clients reveal a lot of misconceptions around inventory financing in Canada. Let’s try and resolve some of those myths around the financing of your inventory, who the players are, who they are not ( that’s the most common myth ) and we’ll also try and provide some straight forward direction on next steps in your inventory financing challenge.

The overall quality of your inventory management will play a large part in your ability to finance your products, which are a part of the current assets component of your balance sheet. You cannot overlook the importance that an inventory lender will place on your ability to report and count your products. The reality is that most firms are either carrying a ‘ continuous’ or ‘ ‘periodic’ system of inventory control.

So here is solid tip # 1 – be aware that inventory lenders prefer a continuous type of inventory accounting, for all the obvious reasons. Essentially you are counting and monitoring inventory (with the use of software of course!) at all times. That’s a good thing when it comes to a lenders valuation on an ongoing basis and their ability to lend.

You’re company is growing. Unfortunately so is your inventory! And that places a huge drain on your cash flow. The working capital cycle dictates that cash turns into inventory which turns into receivables and then we start all over… that lag can be anywhere from 60 – 120 days, sometimes longer. Never underestimate the problem that higher sales will bring to your inventory financing needs.

Clients typically are looking for inventory financing because the level of investment that you have in product and receivables drains your cash flow. As sales volumes increase your cash flow decreases based on your overall collection period of A/R and of course those inventory turns.

Your sales staff of course never wants to be in a position to tell a customer you don’t have the product they have worked so hard to sell.

Does your company have an inventory financing strategy? The majority of firms we talk to in Canada, certainly in the small and medium business sector do not have access to the inventory financing they need. Do true inventory financing companies exist in Canada? We feel that the answer is generally ‘ no ‘, they do not. However if your firm would consider an asset based lending scenario that in effect takes the place of inventory finance companies in Canada.

Under an asset based lending strategy your inventory is margined for what its worth, by experts who categorically know what its worth. You will enhance your ability to finance your product if you have the controls, reporting, and inventory accounting system in places that makes the inventory and asset based lender ‘ comfortable ‘.

Speak to a trusted, credible, and experienced business financing advisor with regards to inventory financing companies and asset based lenders who will give your product the financing it deserves!

How Asset-Based Loans From Commercial Finance Companies Differ From Traditional Bank Loans

When it comes to the different types of business loans available in the marketplace, owners and entrepreneurs can be forgiven if they sometimes get a little confused. Borrowing money for your company isn’t as simple as just walking into a bank and saying you need a small business loan.

What will be the purpose of the loan? How and when will the loan be repaid? And what kind of collateral can be pledged to support the loan? These are just a few of the questions that lenders will ask in order to determine the potential creditworthiness of a business and the best type of loan for its situation.

Different types of business financing are offered by different lenders and structured to meet different financing needs. Understanding the main types of business loans will go a long way toward helping you decide the best place you should start your search for financing.

Banks vs. Asset-Based Lenders

A bank is usually the first place business owners go when they need to borrow money. After all, that’s mainly what banks do – loan money and provide other financial products and services like checking and savings accounts and merchant and treasury management services.

But not all businesses will qualify for a bank loan or line of credit. In particular, banks are hesitant to lend to new start-up companies that don’t have a history of profitability, to companies that are experiencing rapid growth, and to companies that may have experienced a loss in the recent past. Where can businesses like these turn to get the financing they need? There are several options, including borrowing money from family members and friends, selling equity to venture capitalists, obtaining mezzanine financing, or obtaining an asset-based loan.

Borrowing from family and friends is usually fraught with potential problems and complications, and has the potential to significantly damage close friendships and relationships. And the raising of venture capital or mezzanine financing can be time-consuming and expensive. Also, both of these options involve giving up equity in your company and perhaps even a controlling interest. Sometimes this equity can be substantial, which can end up being very costly in the long run.

Asset-based lending (or ABL), however, is often an attractive financing alternative for companies that don’t qualify for a traditional bank loan or line of credit. To understand why, you need to understand the main differences between bank loans and ABL – their different structures and the different ways banks and asset-based lenders look at business lending.

Cash Flow vs. Balance Sheet Lending

Banks lend money based on cash flow, looking primarily at a business’ income statement to determine if it can generate sufficient cash flow in the future to service the debt. In this way, banks lend primarily based on what a business has done financially in the past, using this to gauge what it can realistically be expected to do in the future. It’s what we call “looking in the rearview mirror.”

In contrast, commercial finance asset-based lenders look at a business’ balance sheet and assets – primarily, its accounts receivable and inventory. They lend money based on the liquidity of the inventory and quality of the receivables, carefully evaluating the profile of the company’s debtors and their respective concentration levels. ABL lenders will also look to the future to see what the potential impact is to accounts receivable from projected sales. We call this “looking out the windshield.”

An example helps illustrate the difference: Suppose ABC Company has just landed a $12 million contract that will pay out in equal installments over the next year, resulting in $1 million of revenue per month. It will take 12 months for the full contract amount to show up on the company’s income statement and for a bank to recognize it as cash flow available to service debt. However, an asset-based lender would view this as receivables sitting on the balance sheet and consider lending against them, depending on the creditworthiness of the debtor company.

In this scenario, a bank might lend on the margin generated from the contract. At a 10 percent margin, for example, a bank lending at 3x margin might loan the business $300,000. Because it looks at the trailing cash flow stream, an asset-based lender could potentially loan the business much more money – perhaps up to 80 percent of the receivables, or $800,000.

The other main difference between bank loans and ABL is how banks and commercial finance asset-based lenders view the business’ assets. Banks usually only lend to businesses that can pledge hard assets as collateral – mainly real estate and equipment – hence, banks are sometimes referred to as “dirt lenders.” They prefer these assets because they are easier to control, monitor and identify. Commercial finance asset-based lenders, on the other hand, specialize in lending against assets with high velocity like inventory and accounts receivable. They are able to do so because they have the systems, knowledge, credit appetite and controls in place to monitor these assets.

Apples and Oranges

As you can see, traditional bank lending and asset-based lending are really two different animals that are structured, underwritten and priced in totally different ways. Therefore, comparing banks and asset-based lenders is kind of like comparing apples and oranges.

Unfortunately, many business owners (and even some bankers) don’t understand these key differences between bank loans and ABL. They try to compare them on an apples-to-apples basis, and wonder especially why ABL is so much “more expensive” than bank loans. The cost of ABL is higher than the cost of a bank loan due to the higher degree of risk involved in ABL and the fact that asset-based lenders have invested heavily in the systems and expertise required to monitor accounts receivable and manage collateral.

For businesses that do not qualify for a traditional bank loan, the relevant comparison isn’t between ABL and a bank loan. Rather, it’s between ABL and one of the other financing options – friends and family, venture capital or mezzanine financing. Or, it might be between ABL and foregoing the opportunity.

For example, suppose XYZ Company has an opportunity for a $3 million sale, but it needs to borrow $1 million in order to fulfill the contract. The margin on the contract is 30 percent, resulting in a $900,000 profit. The company doesn’t qualify for a bank line of credit in this amount, but it can obtain an asset-based loan at a total cost of $200,000.

However, the owner tells his sales manager that he thinks the ABL is too expensive. “Expensive compared to what?” the sales manager asks him. “We can’t get a bank loan, so the alternative to ABL is not landing the contract. Are you saying it’s not worth paying $200,000 in order to earn $900,000?” In this instance, saying “no” to ABL would effectively cost the business $700,000 in profit.

Look at ABL in a Different Light

If you have shied away from pursuing an asset-based loan from a commercial finance company in the past because you thought it was too expensive, it’s time to look at ABL in a different light. If you can obtain a traditional bank loan or line of credit, then you should probably go ahead and get it. But if you can’t, make sure you compare ABL to your true alternatives.

When viewed in this light, an asset-based loan often becomes a very smart and cost-effective financing option.

Car Finance Company

Having a new car is one of the biggest achievements that most people can have. Other than financing education and buying a home, there is really nothing else that can compare to the huge expenditure that comes with purchasing a new car.

Therefore, only a few people can really afford to pay for a car outright. Most people rely on car financing in order to purchase a new car. But with the many car financing options available nowadays, it is wise to research thoroughly for a car financing company that offers the best rates.

Most car financing companies offer better deals compared to local car dealers. While it is convenient to have your car dealer provide you with the loan and plan, it is still better to get pre-approval from a car financing company because they offer more reasonable interest rates and payment options. To choose the car financing company with which to conduct your transactions, you have to consider two things: their rates and reliability.

Car financing companies vary on the interest rates they offer to customers. If they have seen that you have good credit history, the interest rate on your car financing loan may not be as high compared to a person with bad credit history. And if you really want to secure car financing with low interest rates, you should try looking for an online car financing company. By applying for your loan online, you save the company time and money, thus the savings from the cost of doing business are passed on to you.

In addition, you should also check the credibility of the company, especially if you want to do your transactions online. You have to make sure that the company you choose has been in operation for years. Aside from this, you can also ask your colleagues and friends who have already secured car financing from a car financing company about their experiences in loan application. They can recommend a suitable company to you.

Finding a car financing company for your loan application can be difficult if you do not know what to consider and where to start your search. But if you go online and ask trusted sources for their recommendations, you can easily compare car financing rates and select the best deal for you.