Extending Cash Runway: What Entrepreneurs Need to Know

Healthy cash flow is the most crucial element for sustained growth. For emerging consumer packaged goods and ecommerce businesses, managing cash flow can be particularly challenging. This is where asset-based lending, specifically inventory and accounts receivable backed lines of credit, can serve as a lifeline, extending cash runway and providing the necessary capital to navigate through growth phases and seize opportunities.

In this post, we'll take a closer look at what entrepreneurs need to know about leveraging asset-based lending to extend their cash runway and grow - effectively.

Understanding Asset-Based Lending

Asset-based lending (ABL) is a financing solution where a business secures a line of credit using its assets as collateral. Unlike traditional loans that rely heavily on creditworthiness, asset-based lending focuses on the value of the assets, such as inventory, accounts receivable, and sometimes equipment. This makes it an attractive option for emerging CPG and ecommerce businesses that might not have extensive credit histories but possess valuable assets.

Leveraging Inventory and Accounts Receivable

Inventory and accounts receivable are often the most significant assets for emerging businesses. Inventory represents products that are ready for sale, while accounts receivable are the payments owed by customers for goods or services delivered. Asset-based lenders evaluate the value of these assets and extend a line of credit based on a percentage of their appraised worth.

Benefits of Asset-Based Lending

Flexibility & Growth

One of the primary advantages of asset-based lending is its flexibility. Unlike traditional loans with fixed terms and repayment schedules, asset-based lines of credit provide businesses with more flexibility in managing their cash flow. As sales and inventory fluctuate, the available credit adjusts accordingly, providing entrepreneurs with greater agility in responding to market demands.

Maintaining a healthy cash flow also empowers a company to seize exciting new opportunities, navigate unforeseen challenges, and undertake the necessary risks for achieving sustainable growth. When businesses are not able to do the above, achieving sustainable and healthy growth becomes more difficult to attain.

Weather Unexpected Challenges

For many businesses, access to capital is crucial for scaling operations and seizing growth opportunities. The funding allows entrepreneurs to unlock capital tied up in their inventory and accounts receivable, providing the liquidity needed to invest in marketing, inventory, and expansion initiatives. It also allows businesses to overcome unexpected challenges, such as a global pandemic, that can completely transform the operations of an organization.

Growth Potential

By extending a business’s cash runway, asset-based lending enables it to focus on growth without being constrained by cash flow limitations. Whether it's launching new product lines, entering new markets, or investing in ecommerce infrastructure, having access to capital empowers entrepreneurs to pursue strategic initiatives that drive long-term success of the business.

Key Considerations

While asset-based lending offers numerous benefits, entrepreneurs should be mindful of certain considerations when exploring this financing option:

Asset Valuation

The amount of credit extended by asset-based lenders depends on the value of the assets used as collateral. It's essential for business operators to have a clear understanding of how their inventory and accounts receivable are valued to maximize the available credit.

Monitoring and Reporting

Asset-based lenders typically require regular reporting and monitoring of inventory levels, accounts receivable aging, and other financial metrics. Businesses should be prepared to provide accurate and timely data to maintain compliance with the terms of the lending agreement.

Cost of Capital

While asset-based lending can provide access to much-needed capital, it's essential to also consider its cost. Interest rates and fees associated with asset-based lines of credit may be higher than traditional financing options. Companies should carefully evaluate the overall cost of capital and assess its impact on profitability.

Conclusion

Extending cash runway is critical for emerging CPG and ecommerce businesses seeking to sustain growth and navigate market challenges effectively. Asset-based lending offers a flexible solution by leveraging inventory and accounts receivable to secure lines of credit. With its flexibility, access to capital, and potential for growth, asset-based lending empowers growing businesses to seize opportunities and drive long-term success.

However, it's essential to understand the key considerations and carefully evaluate whether asset-based lending aligns with your financing needs and business objectives. By leveraging asset-based lending effectively, entrepreneurs can strengthen their financial position and fuel their business's long-term growth.

Questions about asset-based lines of credit? The Assembled Brands Team is here to help!