Asset based loans: A blessing in disguise

Asset-based loans are the primary requirement of any business today. Everyone knows that a business's finances need a boost in sluggish market conditions. These loans can actually be used to finance the operations of the business when the receivables are not met on time. These receivables might be slow because either the customer is facing a slow market or there is a lack of sales for the business itself. The lack of sales usually happens for businesses that face seasonal variations in sales. As a result, either the lack of funds from the debtors or a sluggish market can actually lead to a halt in operations, which can be dangerous for any business. But asset-based loans ensure that businesses continue to have a stable cash flow despite poor sales or defaulting debtors.

However, there are also certain businesses where it is customary to have high receivables to encourage sales. Such businesses build good business relations based on their lending to regular customers. So, the asset that is used to secure such loans is the accounts receivable themselves.
The asset-based loans, however, need to be used sparingly for any business, despite the advantages they seem to offer to cash-strapped businesses. It's because sometimes the businesses may develop a wrong mindset of holding more inventory than required, just because they can be used to finance a loan. Tying up cash in extra inventories must be avoided. This is where the asset-based loans need to be used judiciously because talking about such loans to build useless inventories is a foolish phenomenon. For any business, the ideal situation is to reduce the habit of taking such loans by maximizing sales and getting rid of held-up inventories rather than taking loans to finance them.

Any business that is using an asset-based loan needs to work on its internal cash policies also which led to the crunch. Sometimes, there could have been cash withdrawals for personal purposes, not yielding any returns.
Hence, the aim of any business should be to meet all its expenditures rather than taking asset-based loans to finance them.

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