eight types of collateral your business can leverage for working capital

Eight types of collateral your business can leverage for working capital

The FUNDamentals Blog

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Financing options

P2Binvestor | The FUNDamentals Blog

• If you’re a growing business in search of working capital, you have several financing options available to you. The trick is knowing which assets your business should leverage as collateral. Here is a list of eight types of collateral your business may have that could help you get access to working capital.

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Accounts Receivable (AR)


• Asset-backed lines secured with accounts receivable are among the most common types of financing. This type of financing allows business that extend payment terms such as net 30 or net 60 days to have access to working capital instead of having to wait for invoices to get paid. A lender can advance your company up to 80% of the invoice value which you can use to fund operations. Checks from your payors are often sent directly to your lender which also decreases the burden of managing your AR.

• There are several lenders who specialize in these loan types including BlueVine, P2Binvestor, Fundbox and more.

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Inventory• Businesses that stock inventory often face cash flow

challenges as a result of their production cycles and/or product seasonality. You may have a warehouse full of finished goods that are ready to ship, but need capital to continue operations until those products sell and you receive payment. There are many lenders who specialize in inventory loans and can provide a revolving line of credit cased on a certain percentage of your cost of inventory or a percentage of the Net Orderly Liquidation Value.

• OnDeck and Kabbage, are two lenders who can provide these types of loans.


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Monthly recurring revenue (MRR)


• Software-as-a-Service (SaaS) companies operate on a subscription revenue mode and often have future contractual revenue, but lack working capital to fuel early growth. In the past, SaaS businesses have been forced to give up equity in order to get the cash they need to grow. However, there are now a few lenders who have begun to offer loans based on MRR. If your business operates under the SaaS model, you can submit subscription details to a lender who will usually fund 2x-3x the value.

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Equipment • Purchasing your own equipment can be a crucial step in

growing a business. It will help you build equity and can also bring down your taxable income while allowing you to improve your bottom line. However purchasing equipment is often expensive and will inevitably take much of your working capital out of play. If you’re looking to purchase a piece of equipment, you should absolutely consider equipment financing. Much like rending a car, the equipment itself serves as the collateral and you’ll make monthly payments with a fixed interest rate.


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Personal assets


• If your business is in a crunch, you may want to consider leveraging some of your personal assets as collateral for a short-term loan. Some lenders will consider high-value or luxury assets such as cars, gems, jewelry, and gold as collateral for a loan. Keep in mind that these lenders must take physical possession of your item and may also need to have it appraised. However, this may be an attractive option if you need cash fast as many loans can be made within 24 hours of receiving the item. Also, a background check is not required.

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Patents


• Patents are a less common asset type, but a viable option for some businesses. If you believe you are in possession of a valuable patent and are seeking a business loan, you will need to first go through a valuation process to determine it’s market value. As you move forward, you can decide to sign a securities agreement detailing what happens in the event of default or you may choose to assign the patent to your lender who will then give your company rights to produce products under the patent.

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Real estate


• If your business owns a commercial building and occupies more than 50% of the space, you can apply for a commercial real estate loan with a bank or private lender. The loan to value (LTV) will range from 65% to 80% depending on the type of property. These loans are usually made to the business entity itself secured by a lien on the property.

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Purchase orders


• Many manufacturers need money on the front end of the production cycle in order to buy the raw materials and/or pay manufacturers to create their product. In this case, a lender can issue a letter of credit to your manufacturer for the cost of goods/services needed to create your product. Once it is made and shipped to your client, your client remits payment directly to the PO financer who then remits the remainder back to you. Using PO financing, your business will have the ability to manufacture products and fill large purchase orders that would be too large for your normal cash flow to handle.

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