Which industries most commonly used asset based loans?
Asset based loans are a common variety of a loan to small businesses and these loans are most commonly used by manufacturers and wholesalers who maintain a significant amount of inventory that needs to be financed by a lender. More than any other industry these businesses can benefit from these types of loans, as they need to purchase and try to sell large amounts of inventory and often the payment time from the purchase of goods through an outflow, to the time that sales are actually collected can be lengthy.
Manufacturers and wholesalers come in many different shapes and sizes and no one magic formula fits all businesses in these classes. Instead, consideration of the industry these companies are in can impact the loan type they pursue. Any company that has a long duration from purchase of component parts or raw materials to collection are prime candidates for asset based loans. A good example of this is a defense contractor who may be set to earn a significant amount from a governmental contract, but the ultimate collection of that amount may take a long time to completion. This makes them a prime candidate for an asset based loan. However, a business that sells regularly and can finance their operations from their regular sales and collections without seasonality may not need any sort of loan, and definitely not an asset based loan to finance their operations.
Understanding a business is therefore a paramount step towards deciding the best type of a loan for a business and should be performed from the get go.