For many small and mid-market businesses, access to the right type of financing can make the difference between managing growth strategically and stretching resources too thin. Understanding the benefits and capabilities of flexible forms of financing, like lines of credit and asset-based loans, can help you decide whether one of these funding vehicles may be a good fit for your company.
Balancing Growth and Cash Flow
Every business, even the most profitable, faces cash flow challenges at times. Seasonal sales cycles, delayed customer payments, inventory buildup, or rapid expansion can all put pressure on liquidity.
Traditional term loans, where you borrow a lump sum and pay it back over a period of years, can be the right solution in certain situations. But term loans have a rigid structure and can be difficult or slow to secure. On the other hand, short-term borrowing like merchant cash advances or credit cards are easy to secure (too easy?) and can become costly and unsustainable.
Sometimes the right fit for a growing business is a flexible, fit-for-purpose financing option that allows for temporary draws and flexible repayment options. Lines of credit and asset-based loans offer adaptable ways to access capital as you need it but serve slightly different purposes and are structured around different financial strengths.
Small Business Financing: Traditional Bank Lines of Credit
A traditional business line of credit functions much like a credit card for your business but usually with a much lower interest rate: you’re approved for a set borrowing limit by a bank and can draw funds as needed, repay them, and draw again.
The bank lender sets a credit limit based on your business’s financial strength, cash flow, and credit history. You only pay interest on the funds you actually use, and as you repay, your available balance replenishes (depending on the terms).
Common Types of Business Lines of Credit
- Secured Line of Credit: Backed by collateral such as receivables, inventory, marketable securities, or real estate. Typically offers higher limits and lower rates.
- Unsecured Line of Credit: Based on the business’s or owner’s creditworthiness. Easier to access small amounts of working capital without pledging assets.
- Revolving vs. Non-Revolving: Revolving lines can be reused as you repay funds; non-revolving lines close after full repayment.
When Is a Business Line of Credit the Right Fit?
Lines of credit are ideal for managing short-term working capital needs, such as:
- Covering payroll or operating expenses during slow periods
- Purchasing inventory ahead of a busy season
- Managing timing gaps in receivables
They provide the liquidity to smooth out normal business fluctuations without committing to long-term debt.
Things to Consider
- Secured Line of Credit: Backed by collateral such as receivables, inventory, marketable securities, or real estate. Typically offers higher limits and lower rates.
- Unsecured Line of Credit: Based on the business’s or owner’s creditworthiness. Easier to access small amounts of working capital without pledging assets.
- Revolving vs. Non-Revolving: Revolving lines can be reused as you repay funds; non-revolving lines close after full repayment.
Small Business Financing: Asset-Based Lending
Asset-based lending (ABL) is another flexible financing structure, typically secured by one or more types of company assets, such as accounts receivable, inventory, or equipment. Unlike a traditional line of credit, which typically has a fixed amount, the available funding for an ABL often fluctuates each month based on the updated value of the underlying assets. The amount you can borrow depends on this “borrowing base”, the value of those assets, rather than just your credit profile or financial ratios.
A lender evaluates your eligible assets and establishes a borrowing base – for example, 50% of the inventory value. As your assets fluctuate, your borrowing capacity adjusts accordingly.
Common Types of Asset-Based Financing
- Accounts Receivable Financing: Borrowing against outstanding invoices to improve cash flow.
- Inventory Financing: Leveraging stock on hand to fund operations or purchases.
- Equipment Financing: Unlocking value tied up in owned equipment.
When is an ABL the Right Fit?
Asset-based loans are designed for businesses with substantial assets or high receivable volumes that may not meet the strict financial requirements of a traditional bank loan or that may want some of the additional flexibility that an ABL provides.
This Type of Financing is Especially Useful for:
- Rapidly growing companies that need scalable capital
- Businesses with seasonal or cyclical cash flow
- Companies in restructuring phases
Things to Consider
Asset-based loans often involve more lender oversight, such as collateral audits or monthly reporting, and may have slightly higher costs. However, they typically offer greater borrowing capacity and flexibility than traditional bank loans, particularly for businesses with strong balance sheets.
Evaluating Your Financing Options
While traditional lines of credit and asset-based loans provide unique benefits and serve their own specific purposes, they are only parts of a broader landscape of financing options. Depending on your goals, you might also consider:
- SBA or term loans for long-term expansion
- Equipment financing to modernize operations
- Working capital loans for everyday expenses
The key is to align the right financing structure with your company’s needs while ensuring that the cost, flexibility, and risk profile fit your stage of growth and ability to service the debt.
Sabre Financial Group Helps You Choose the Right Financing Structure for Your Business
Selecting the right financing option isn’t just about interest rates or loan size — it’s about aligning your capital strategy with your business goals and finding the best lender(s) to suit your unique situation. If you are evaluating different financing options, Sabre Financial Group can help you access quality financing options and make more strategic and business-aligned decisions throughout the journey.
Our team analyzes your company’s financial health, cash flow patterns, and asset structure to identify the most effective financing approach. And whether your financial and operational profile lends itself best to a revolving line of credit, an asset-based facility, or another type of loan, Sabre will recommend and help you to secure appropriate financing solutions that support sustainable, long-term growth.
Contact us today to schedule a complimentary consultation.