A Guide to Asset-Based Lending: Everything You Need to Know

Posted at July 14, 2020 » By : » Categories : Business Funding »
asset-based lending

If your business is financially struggling, asset-based lending can help you.

When a business needs cash, one of the first things owners think about is a loan. However, there are a plethora of lending options available to businesses, making it difficult to choose one. With asset-based lending, you can avoid poor terms and get a loan that suits your needs.

Asset-based lending is all about borrowing money based on your assets. An asset is anything of value that your business owns. Lenders can use these assets as collateral, but they won’t accept just anything.

Keep on reading to learn everything you need to know about asset-based lending!

What Is Asset-Based Lending?

Asset-based lending is a type of business financing that revolves around borrowing money while providing the lender with company assets. These assets are used as collateral to encourage the company to repay them.

It’s normal to see asset-based loans set up as revolving lines of credit. This lets a business continue borrowing money whenever they need to cover expenses as they grow.

How It Works

Businesses take out loans for a variety of reasons to help them keep up with demand. For example, a business may borrow money to cover payroll if they’re in a slow period where they’re not bringing in much income.

If a business doesn’t have enough cash flow or cash assets to be approved for a loan, they may be offered an asset-based loan. This is common with businesses such as restaurants, which have expensive equipment but occasionally suffer from downtime.

The terms and conditions of an asset-based loan will vary depending on what’s offered as collateral. In most cases, lenders prefer assets that can quickly be converted to cash, such as accounts receivable.

Lenders try to avoid giving loans when only physical assets are offered because it’ll take much longer to get their money back. If they do offer a loan based on physical assets, you can expect the amount to be lower than how much they’re worth.

Like all loans, the interest rates will vary as they’re based on one’s credit history, cash flow, and how long they’ve been in business.

Asset-Based Lending Benefits

Asset-based lending has become popular because it provides a plethora of benefits that are desirable to businesses. Whether you’re a small business looking to grow or a medium-sized one that’s facing a hurdle, an asset-based loan can help you.

Here are some of the main asset-based lending benefits:

Easy to Acquire

One of the best things about asset-based loans is that they’re easier to get than most loans and lines of credit. If your business has a short track record, you can still get an asset-based loan providing that you’ve shown to be profitable. The most important thing you’ll need is highly liquid collateral.

Your accounts receivable will be one of the best things to offer as collateral, especially if you’re a small business without much history. If a lender still isn’t budging, you can also offer some physical assets to increase the likelihood that you’re approved.

Flexibility

Different asset lenders will come up with unique terms that explain what you can and can’t spend the money on. However, most asset-based loans can be used for anything providing that it’s for business purposes.

Being able to spend the money on anything makes asset-based loans a lot more flexible compared to other loans, such as a business equipment loan. Because these loans revolve around the value of your collateral, it’s easy to get approved for a new loan if need be.

Can Be Used to Move Forward

When companies are struggling to grow, an asset-based loan can be used as a stepping-stone to success. With this type of loan, your business can build a relationship with the lender, providing you with better options in the future.

As you build your credit and loan history, you can start seeking new loans with more favorable terms. In many cases, you can kickstart your business to the point where you won’t need to borrow money anymore.

Who Qualifies for Asset-Based Lending

Asset-based lending is offered to businesses that have stability and assets that can be used as collateral. Most of the businesses that take out asset-based loans are small and mid-sized companies. However, some large businesses will take out loans.

If you’re looking into an asset-based loan, you can’t offer assets that are currently pledged to another lender. So if you own a restaurant and would like to offer equipment, you cannot have another loan that’s using that equipment as collateral.

However, you can use those assets for another loan after you’ve repaid the lender. If you have any accounting, legal, or tax issues, you could prevent your assets from being used as collateral because a lender won’t have certainty that the assets will be available if they need them.

Consider Getting an Asset-Based Loan Today

No matter what the size of your business is, you should consider asset-based lending if you’re looking to improve your company’s liquidity. If you’re struggling to grow your business, these loans are readily available for you to acquire.

Keep in mind that the main thing that will affect your chance of getting an asset-based loan is what kind of assets you have. You’ll have to meet with a lender to see what they’d be interested in. From there, you can negotiate until you come up with something that will work for both of you.

Apply for business funding today to get your business on the right path to success.