Working capital is an essential part of a continuing business. Unfortunately, it’s easy to run short on working capital, no matter how many assets a business possesses. In such a situation, well-informed businesses turn to asset-based loans. Asset-based loans allow you to get funding from a lender while using one or more of your business assets as collateral. This allows you to avoid getting into more debt if you are already in debt. However, you must understand what it entails before determining whether your business is right for asset-based loaning.
What is asset-based lending, and what does it entail?
Asset-based lending is the business of lending money in exchange for collateral. Asset-based lending’s collateral can be the borrower’s:
- accounts receivable
The asset or group of assets that will serve as collateral is fundamental to asset-based financing. For example, the asset could be the borrower’s equipment, business goods, real estate, or even outstanding invoices. When an asset is a collateral, the lender will provide a loan to the borrower based on an agreed-upon proportion of the asset’s value.
If your asset-based lending is a term loan, you will repay the advance plus interest over a certain period. If it’s an asset-based line of credit, on the other hand, you’ll be able to draw on it as needed and only pay interest on the cash you’ve used.
In either situation, your assets secure the funding, and if you default, your lender can seize and sell the assets to cover their losses. As a result, many firms seek asset-based lending to meet their working capital and cash flow requirements, especially when they need help to obtain traditional finance.
What types of businesses are eligible for an asset-based loan?
Asset-based financing is typically available to small and mid-sized businesses that are stable and have financeable assets. The corporation may not offer assets as collateral to another lender. If they commit to another lender, the other lender must agree to have its position subordinated. Furthermore, no severe accounting, legal, or tax difficulties could encumber the assets.
To determine whether your business fully qualifies, consider the following factors:
- Your dependability
Asset-based lenders often emphasize credit ratings less than traditional ones, but creditworthiness is still a consideration when evaluating loan applications. If your company has a good credit history, you may be able to get an asset-based loan.
- The total amount of debt you owe
Asset-based lending is often better suited to enterprises with modest levels of debt. However, if your company is already heavily in debt, it may be easier to qualify for an asset-based loan.
- Your company’s objectives
Asset-based loans can be an excellent option for companies that need to borrow money to:
- make major acquisitions
- expand their operations
- capitalize on a business opportunity
If these are your objectives, an asset-based loan may be a suitable fit for you.
- The nature of your assets
Asset-based loans are often best suited for companies with many physical assets, such as equipment or inventory, that can be easily evaluated and used as security.
Asset-based loans can be an excellent way to finance beginning costs or fill operations gaps during slow times. If you have a lot of physical assets, relatively low levels of debt, a great credit history, and specific business goals that you want to finance, an asset-based loan may be perfect for you. Before deciding to borrow money for your business, consulting with a financial professional is usually a good idea.