Consider Your Financing Options: People & Companies

For various financing scenarios, shop owners must consider the different products that can be utilized and the impact they may have on business operations.

February 15, 2025By Tom Stamborski

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In my November article, I discussed the importance and critical need for proper financing. I highlighted the benefits while identifying the downside of not focusing on this issue or delaying taking action. In this month’s article, I’ll address various scenarios that a business owner can face, financing products that can be utilized, and their impact on the business’ operations and financial results.

The first, and all-too-common scenario, is when a customer delays payment of a valid invoice. Besides trying to hold on to their cash, other issues affect the situation. In many instances, their customers are trying to conserve their cash as well. As we all know, the delayed payment of an invoice has a direct impact on the business’ cash flow. In the absence of predictable cash flow, business decisions are modified, deferred or shelved. Conversely, having timely cash flow allows for uninterrupted business operations. To address this issue, invoice financing, commonly known as factoring, provides for the assignment of qualified invoices to the finance company in exchange for immediate access to funds. It leverages a current asset without creating debt. It can be used strategically, based on customer, specific invoice and timing.

In a manufacturing setting, equipment is a critical component of business operations. Over the years, technology, customer requirements and business growth have driven the demand for more sophisticated and expensive equipment, along with the number of units needed. This can place an undue burden on a company, depending upon its financial condition, as to acquiring the equipment needed. Frequently, a cash purchase is not feasible. As an alternative, equipment financing or leasing can allow the company to acquire the equipment over a specified time frame, while conserving cash for day-to-day operations. There are various formats as to terms and whether the company wants to ultimately own the equipment or just pay for its use. In a fast-moving technological environment, obsolescence also plays a part in deciding how the financing will be structured. Ultimately, this type of financing allows a company to keep pace with customer demand and the ability to use technology as a competitive advantage.

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When contemplating alternatives for a revolving line of credit, asset-based loans (ABL) are a practical consideration. As the name implies, the availability of funds is based on the collateral value of accounts receivable, inventory, equipment and real estate. Each collateral category is reviewed and assessed a value, against which a predetermined amount will be advanced. This allows a company to utilize their assets versus a cash flow/financial ratio analysis as to how much financing availability is possible. A company need not have all collateral categories to qualify. Accounts receivable is the primary asset and inventory, equipment and real estate can be added as available and desirable.

In some instances, leveraging the value of inventory as a single asset makes sense. This can be done as a specific financing strategy. If accounts receivable, equipment or real estate are already encumbered, inventory can be segregated and be used as collateral for a revolving line of credit. This process would involve a field exam and appraisal to determine the liquidation value of the inventory. Once that value is determined, a percentage advance will be made available to the company. As the inventory is sold and replenished the line will provide an ongoing source of near-term operating cash.

As you review your company’s financing needs, keep in mind any timing issues. Being proactive in assessing your needs and allowing sufficient time to complete your review, initiate a dialogue with a lender. Completing the application and underwriting processes also is important as to the anticipated/preferred implementation. Another important aspect is gauging the financial and operational impact on the company to assess how the desired financing fits into your business plan as to cost and the increased growth and business opportunities it affords.