Debt Financing 101 | Pt 1 of 3
As lenders, we understand that debt can be a bit intimidating! As one of our team members says: “the first time I learned about debt was when the adults in my life told me about how credit cards can be a slippery slope — I didn’t learn about the benefits of debt until I started at Assembled Brands.”
In light of that, this week, we are introducing Debt Financing 101 a series that will take place over three installments.
1. What is Asset-Based Lending? How does a debt facility allow brands to scale rapidly?
2. Debt and equity often complement each other as financing tools; what are the synergies?
3. Debt can be used to finance the acquisition of brands; how does this work, why does this make sense?
Today, we’ll start with question #1.
What is Asset-Based Lending?
Investopedia defines Asset-Based Lending as “loaning money that is secured by collateral.” For the purpose of Assembled Brands asset based loan — collateral is defined as inventory or receivables, but many other Asset Based Lenders look at real estate and other asset classes to make loans.
How does an Assembled Brands’ debt facility allow brands to scale so rapidly?
As consumer spending continues to move online, brands must have enough inventory on-hand in order to meet consumer demand. If not, they risk losing customers as they cannot fulfill orders.
The cycle of purchasing inventory can be extremely challenging for new businesses as these businesses must often pay for the inventory before they see any cash returns — an inventory line of credit can make the purchasing/cash cycle more business friendly.
Debt facilities enable brands to scale up their inventory in order to meet consumer demand. The increased cash-flow allows for the brand to spend on other aspects of the business, including marketing expenditures. With increased marketing spend comes increased demand for products. With access to debt, borrower’s may draw down on their loan in order to finance the purchase of the inventory.