Keeping a business running smoothly is heavily based on having enough capital to sustain the business. Asset-based loans/financing provides a viable option if you need cash suddenly and quickly.
What is Asset-Based Lending?
Asset-based lending is financing based on a company’s assets. More specifically their accounts receivables and inventory. Assets are used as collateral with banks and independent finance companies making this a secured form of lending.
Financial companies advance cash based on an agreed percentage of the asset value, normally between 70%-80% and up to 50% of finished inventory. If you default on your loan, the financial institution will seize the agreed-upon assets.
Getting approved for asset-based loans is fairly simple as long as you have maintained good financial records. Lending companies are going to want to see your financial statements, reporting systems, your most commonly purchased inventory as well as your client/customer base to get an idea of whether or not you’ll be able to repay and whether or not they’d want your assets should you default on the loan.
Who Is It For?
Asset-based loans are great for rapidly growing businesses, businesses that are amid a huge turnaround, or ones that are severely undercapitalized. They also work incredibly well for manufacturers, distributors, and service-based companies that can invoice their services.
However, this form of financing is incredibly expensive, much more than traditional loans, and is best if paid in full within 60 days. Financial institutions are known for sorting through business’ clients and customers choosing the best ones to accept payments from and may not view sales to individuals or small businesses as eligible repayment accounts. Financing companies also impose an audit fee to cover them doing their due diligence on your account and larger banks generally require a personal guarantee of repayment.
Asset-based lending can be very useful in growing your business, but it’s important to consult with a financial advisor to make sure it’s right for your specific financial needs. Choosing the right plan and lender can lead to a long-lasting mutually beneficial relationship.