Cash is King.  As any business owner knows, Operating Cash Flow or Working Capital is the lifeblood of any company. 

When analyzing a business, most people first want to know about the total revenue (sales) and the net income (profit).  These two factors are extremely important, but any business owner would argue that there is another factor that is more important than these two:  Operating Cash Flow or Working Capital.  Profits are great, but no matter how much money is coming in the future, a business can’t continue to operate if it doesn’t have enough cash to cover this week’s payroll.

This is precisely that many companies have historically turned to Asset Based Lending.  As traditional banks have reigned in credit terms in today’s uncertain economy, Asset Based Lenders are playing a more prominent role.  Asset Based Lenders are just what their name implies…lenders who loan money based on a company’s Assets (typically Accounts Receivable and Inventory).  Banks are traditional “Cash Flow” Lenders as they like to see the company generating enough cash flow to support the debt service. 

To properly understand the role that Asset Based Lenders are playing in the small business arena, let’s use an example of a recent business acquisition.  XYZ Company is acquired by an eager buyer who uses an SBA Loan to finance the transaction.  Everything starts out great for the new owner:  their new business is growing, sales are up and they are enjoying the rewards of self-employment.  XYZ Company has many new orders to fulfill or new contracts to service as a result of this growth.  The working capital costs associated with this expansion are typically paid up front while the company won’t receive the benefits until the customer remits payment (sometimes months down the road).  As the new opportunities develop, the up front costs associated with these opportunities keep increasing.  Before long the owner is looking at a significant cash gap from what is owed to suppliers now versus the cash that customers will not remit for another 30, 45 days or more.

The owner realizes that with the recent growth, there is a need for a line of credit.  Obtaining additional funds or refinancing with the SBA Lender typically isn’t an option, so they inquire with their local bank for conventional financing.  This presents a problem:  all business assets are already collateralized with the SBA Loan, leaving the bank with no collateral.  Therefore, the bank is not willing to extend the company a line of credit.  This leaves the owner in quite a predicament:  sales are up and the future looks bright; however, the short term cash flow constraints are keeping the company from taking advantage of that growth. 

This situation is an ideal opportunity for an Asset Based Lender.  Cash flow is tight, so traditional banks likely are not interested; however, with an Asset Based Loan, the company can leverage its Receivables to generate cash for the business.  The company now has the capital it needs for growth without worrying how it will meet its short term cash demands.

Marc Smith is a Vice President with Magnolia Financial, Inc. an Asset Based Lender that provides Accounts Receivable Financing and Management to growing companies that are typically unable to obtain traditional bank loans.  He can be reached at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it or (404) 664-7037.

Mark Smith with Magnolia Financial, Inc. is a Trusted Advisor of the BUSINESS HOUSE, inc. ^SM