It’s not surprising to read that smaller businesses have a harder time acquiring financing than larger companies in the recent Pepperdine Private Capital Index Report for 4th Quarter 2017.  Of the businesses that participated in the study those with revenues from $5-$100 million had a success rate of 70% in acquiring an Asset Based Loan, compared to only 27.4% for businesses with revenues under $5 million. There are several factors that contribute to this staggering difference, let’s explore the factors small business owners can control.

First, I would like to start with what is an Asset Based Loan? It is a form of financing that allows you to borrow against your business assets; such as accounts receivable, inventory and equipment. The value of your assets is used to determine your borrowing availability under a line of credit.  The primary purpose of an asset based loan is to provide you with easy access to the working capital you need to purchase materials, make payroll and cover other operating expenses.

We recently had a small business, with revenue of $5 million, come to us seeking an asset based line of credit. A field exam is part of the application process for an asset based loan so that the lender can determine the values of the assets and viability of the prospects record keeping.  During this step, the field examiner recommended we post pone providing the line of credit or find an alternative way to provide working capital to this company. The reasons were ones that we see often and are very fixable for the company seeking the financing. It came down to the fact that they needed to have more reliable financial books and records. When looking for financing, it is essential for businesses of all sizes to ensure their bookkeeping is of high quality, accurate, reliable and up to date. This can be especially challenging for small businesses when the business owner is trying to wear many hats to save on overhead.

For this company, we recommended exploring two different options. The first is our accounts receivable factoring financing option. Factoring is financing that allows a company to sell their accounts receivable and gain access to the working capital immediately instead of being forced to wait 30, 60, 90 days to receive payment. The second option was to work with an outside bookkeeping consultant and/or part-time CFO. We have found that this can be a cost-effective way for small businesses to improve their financial reporting and ensure they have suitable financial records.  Improved financial records can help increase their success of receiving financing such as an asset based loan.

While this is only one example of the many companies, who have come to us looking to acquire financing the challenges they faced are very common and have solutions that are in the business owners control. Once these steps are taken, it can be easier for these companies to acquire the needed financing. If your company is in a similar situation, please contact us at (800) 523-0881 or info@federalnational.com