What is Asset Based Lending? A Definitive Guide to Securing Business Funding

Posted at February 4, 2020 » By : » Categories : Business Funding »
asset based lending

Each year, more than 627,000 new small businesses open their doors in the United States. No matter what industry they’re in, they all have one thing in common: they need cash to grow and reach new levels of success.

Though traditional business loans are always an option, they’re not ideal for some borrowers. Worse, new businesses often find it hard to qualify for those loans in the first place!

This means you’ll have to look into alternatives to get the money you need. Asset based lending is one of the best choices and gives you access to funds quickly.

Here’s what you need to know about these unique types of loans.

Understanding Asset Based Lending

When you take out a standard business loan, lenders look at your business’s credit score, your average earnings, and other factors when deciding whether to give you the money. This means your business needs to have a successful financial history to qualify for the loan in the first place.

For new businesses without an established financial history, this can be a major problem. Lenders often won’t take the risk. If the business fails or you declare bankruptcy, the lender loses out on all those future loan payments.

Asset based lending allows you to borrow money even when you’re just starting out. Lenders let you secure the loan amount with collateral or valuable property from your business.

The collateral can be your inventory, equipment, accounts receivable, or even your building. If you default on the loan, the lender can take possession of that collateral to settle what you owe.

What Types of Businesses Use Asset Based Loans?

Businesses of all types can use asset based loans as long as they have something to use as collateral. When you apply for the loan, the lender will let you know what types of collateral they’ll accept.

Asset based lenders won’t dive into your business’s financial history or look at your company’s credit score. These details aren’t’ important to them. What matters is that you have something of value to offer should you be unable to repay the loan in full.

How Much Can You Qualify For?

The amount of money you can borrow through the asset based lending process comes from the value of the collateral you use.

Keep in mind that you won’t qualify for a loan that’s worth the full amount of your collateral. Lenders still want to make money by giving you the loan and offering that amount wouldn’t be in their best interest. Instead, you’ll typically get a set percentage of that value.

Regardless of what you qualify for, you don’t have to borrow the full amount. As a general rule, only borrow as much money as you need to accomplish your goals.

Remember, you’ll still have to make monthly payments on the loan. The more you borrow, the higher those payments will be.

You Can Use the Loan as You See Fit

Some business loans have restrictions on the way you can use them. This means you’re stuck using the funds in those specific approved ways. For example, you can’t use a commercial mortgage loan to cover payroll—you can only use it to buy commercial real estate.

With asset based loans, you’re free to use the money however you need to. If you’re looking for cash flow to overcome a slow period, the loan can help you out. If you need to expand quickly to keep up with current demand, asset based loans can give you the cash you need to make it happen.

The lender will never restrict your usage or dictate what you can and can’t do with the funds. This makes it one of the most flexible loan options for businesses.

Asset Based Loans Won’t Increase Your Total Debt

Traditional loans impact your business’s credit score. The more debt you have, the more it hurts your score.

Since your collateral secures the asset based loans, it won’t influence your business’s total debt in the same way. This means you’ll find it easier to qualify for standard business loans at the same time.

They Protect You from Personal Risk

If your business’s credit score isn’t ideal or you’re just starting out, it’s not uncommon for lenders to ask for a personal guarantee. These guarantees let you use personal property as collateral to help you qualify for a standard business loan. For many borrowers, this means using their homes to guarantee a loan.

If you default, the lender can seize that personal property to settle the debt.

Asset based loans aren’t secured by your personal property. Instead, they only use your business’s property. This means your personal assets will be safe.

Always Get Quotes from Different Lenders

No matter what type of loan you’re applying for, you’ll always want to get quotes from different lenders. Remember, some lenders may attach more value to certain types of collateral than others. And what one lender accepts as collateral, another may not.

Once you have several quotes in place, compare them. You’ll want to choose a lender that accepts the type of collateral you’re willing to use and offers monthly payments you can afford.

Before you sign and accept any money, make sure you understand the terms and conditions of the loan completely. If you have any questions, ask the lender to clarify their terms. If anything feels off or you’re not comfortable agreeing to their terms, keep looking.

Is an Asset Based Business Loan Right for You?

Asset based lending is a great option for businesses who need to increase their cash flow quickly. The loans get approved in a fraction of the time as standard loans and you’ll be able to use the money without any restrictions.

However, they’re not the only types of loans you may qualify for.

Let our team help you find the right business loan for your company. Fill out a loan application today and get the money you need quickly.