Asset-Based Loans

Slightly farther up-or farther down the food chain, depending on your perspective-is another source of asset-based financing: suppliers. In fact, suppliers already offer financing by giving most of their customers 30 days to pay their invoices. Many businesses need asset-based financing because their sales cycle is longer than their accounts payable cycle. After all, if you could purchase goods on 30-day terms, sell them and be paid within 15, who would need financing? Unfortunately, most sales cycles take more time.

So before talking to a commercial finance company, start with your suppliers. There are two ways to do this. The first is simply not to pay invoices until they are 90 days old. This gives you three months of financing-in some cases free. You will know this strategy is working if your supplier does not freeze shipments to you after your first invoice is more than 60 days old. The second way is to simply ask your supplier to extend your payment terms. If this is offered in conjunction with a lien on the materials it sells you, the vendor might just bite. After all, even if it doesn't have the cash from you, it has still booked the sale. If your supplier is under pressure to show sales growth quarter to quarter, or year to year, your sale, even if it takes 90 days to collect, is helpful to its cause.

Another way to get a couple of extra days out of your supplier is to test its limits. For instance, if you pay your invoices in 30 days, pay them at 35 days for a few months. If no complaint arises, then stretch payment to 44 days. Why does this work? Because many accounts receivable collection systems flag payments that are older than 45 days. Therefore, if 35 days isn't a problem, chances are 45 days is the magic number to avoid to keep your supplier happy.

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From Where is the Money? Sure-Fire Financing Solutions for Your Small Business, by Art Beroff and Dwayne Moyers. (c) Entrepreneur Press, 1999.

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