Are you seeking capital for your business? If you’re having trouble getting approved for a business loan or line of credit with a traditional bank or credit union, asset-based lending could be a viable alternative. Read on to learn more about how it works and how to explore options for your business.
What Is Asset-Based Lending and How Does It Work?
Asset-based lending is a term used to describe a secured business loan or line of credit. Collaterals may include accounts receivables, equipment, inventory, or other assets present on your balance sheet.
Advantages of Asset-Based Lending
Easier to Obtain
Asset-based financing programs pose less risk to the lender since the funds you borrow are secured with collateral. So, the lender has recourse if you default on the terms of the lending agreement.
Puts Valuable Assets to Good Use
You can use the fixed assets on your balance sheet as security to help access more capital. Doing so potentially leads to increased revenues so you can take your business to new heights.
Greater Flexibility
In most instances, you’ll have the flexibility to use the funds you borrow however you see fit as long as it’s for a business-related expense. Some lenders may also increase the amount of capital they lend to you over time as your revenues and assets increase.
Lower Interest Rate
The interest rates on asset-based lending programs are generally lower than what you’ll find with comparable options, like secured business loans and invoice factoring.
Fewer Covenants
You usually won’t have to worry about many covenants or loan restrictions with asset-based lending.
Disadvantages of Asset-Based Lending
Not All Assets Qualify As Collateral
Even if you have several assets on your balance sheet, some may not qualify to be used as collateral in an asset-based financing arrangement. Generally, the asset should possess a high value, not have a high depreciation rate, and be liquid enough to easily convert it into cash.
Risk of Losing Valuable Assets
Unfortunately, you could lose your assets if you cannot keep up with the monthly payments required on the business loan or line of credit.
Higher Costs
When applying for an asset-based lending product, you may find that the loan processing fees are slightly higher. This is a result of the level of scrutiny these loans and lines of credit require before the lender can issue a decision regarding your application.
Which Businesses Can Benefit From Asset-Based Lending?
Those With Asset-Rich Balance Sheets
Ideally, you want to have a sizable amount of inventory, accounts receivables, or equipment on hand (and listed on your balance sheet) to get the most out of asset-based lending.
Those With Varying Cash Flow
Asset-based lending can also help your business stay afloat if you experience cash flow issues.
Those Seeking Capital
This form of lending is also suitable if you want to expand operations and capitalize on new business opportunities.
Some Examples of Assets That Can Be Used
Marketable securities
Marketable securities are highly liquid, have a maturity period of one year or less, and can be traded on a public stock or bond exchange.
Accounts receivables
Accounts receivables are the total sales made on credit that your company hasn’t yet collected payment for from customers.
Machinery
Machinery is classified as property, plant and equipment. These are fixed assets expected to have a useful lifespan of more than one year.
