Asset Based Lending

Asset-based lending refers to a type of financing where a business can leverage its assets to generate capital. The borrower insures the lender through their business assets, and if the borrower fails to pay the loan or follow the contract, the lender can take their assets as compensation.

Asset-based credit is also known as business credit since it is not based on income but rather on the value of the business itself. So if your business owns an asset that has value, you can use it to attain financing.

This is the safest and less-risky kind of loan, unlike unsecured loans that are not protected by assets. Another benefit is that the interest rate will be lower than the usual charge.

Related: Asset-Based Loans vs. Cash Flow Loans: 3 Key Differences

Asset-based lending takes the money that its customers own or capital in stock and uses it to fund working capital or buy equipment. Because these assets are often not worth the same as their face value, the interest rate charged on these loans tends to be high. The duration of these loans tends to be short, with a seven to twelve-month time frame. That means they are a good source of funding when a company needs additional capital but doesn’t have time to go through the standard loan application process.

Lenders also approve businesses for larger amounts of money, with longer terms and higher interest rates than traditional loan options, which makes it a viable option for startups. Here’s how asset-based loans work:

1. A business lists their assets
2. Make sure to include bank statements, tax returns, and property records
3. The lender either buys or pledges the assets that are on a promissory note
4. When you take out an asset-based loan, you’ll receive an advance on the assets, and then you repay that amount over time

Asset-based lending helps businesses with a strong cash flow that are looking to purchase specific equipment (think equipment leases). Businesses can also use it as an alternative to bank financing in situations where you have time constraints that make it difficult to complete the entire loan process.

Before you go for an asset-based lending arrangement, you must see if you have assets or properties that you can put up as collateral. Here are some of the assets good for asset-based loans:

• Real Estate Properties: The real estate that the borrower has paid for also qualifies as collateral for asset-based loans. If you plan to put up your real estate properties during loans, you have to get them appraised to see their value and to assess if it is good to serve as collateral for your loans.
• Accounts Receivables: If you invoice customers, you can put up the receivables due for at least 30-90 days as collateral. The greater the amount you have invoiced, the more you can borrow from your lender. That is because your assets are now of higher value.
• Inventories: If you own a business or are in the retail industry, you can use your inventory as collateral. It would be even better if you have a lot of inventory with you. Your lender can raise the resale value to secure your loan arrangements.
• Equipment and Machinery: If you own a business, the expensive equipment and machinery you own can also be put up for asset-based lending.

Just like any other loaning arrangement, asset-based lending also has its advantages and disadvantages. You must learn if the asset-bend lending set-up would be more advantageous for you or not.

Advantages

Asset-based lending is common in the small business industry, as it offers several benefits to small businesses.

• Low-interest rates: Unlike other loans, asset-based loans have lower interest rates. This is because of your assets’ value, and this would also work if your credit records are good.
• Faster application and funding: Your loan process would be processed faster, unlike any other loan. As long as you are eligible from the lending criteria, you can expect a faster approval on the loan.
• Assures financial stability: Since asset-based lending is processed faster, you will receive the funds immediately when you need them. You can use the money to continue your business and avoid bankruptcy.
• Raise funds without giving up equity: While income-based financing is usually based on your business’s revenue and profits, asset-based lending is based on the value of your business’s assets, which doesn’t put a large amount of pressure on your revenue and profits. In revenue-based financing, the lender will often want a large equity stake – but in asset-based lending, you won’t have to give up any of your company’s ownership.
• No long-term commitment: You can start and stop the loan whenever you want, as long as it is within the terms of the agreement.
• Greater flexibility with funds: Since the loan is based on your business’s assets, you have more freedom to use the funds however you want. You can use it for anything from expanding your building to purchasing new equipment.

Disadvantages

• Assets are at stake: If you choose to default or not pay your loan, your business assets will possibly be taken by your lender as compensation.
• Additional fees: You might possibly pay for other fees, even if you have low-interest rates that come with asset-based loans.
• Limitations with borrowing: The amount you can borrow will depend on the value of your assets.

Anyone with a viable business idea and an asset they can leverage can apply for an asset-based loan. However, most applicants are businesses with a proven track record of success and established experience in their industry. This is because asset-based lending is a riskier form of financing since the lender does not have a clear picture of your income or profits. Therefore, a lender will usually look for businesses that strongly influence the loan’s success.

If your business meets the requirements, the application process for an asset-based loan is relatively simple. Below are the steps to follow when applying for an asset-based loan:

1. First, find an asset-based lender willing to work with your business. You can do this by searching the internet or asking other business owners for recommendations. Once you’ve decided on a lender, you’ll simply have to fill out a short application.
2. Next, the lender will look over your credit and business history. Once the lender approves your application and credit report, they’ll send you the terms of your loan. This is usually a speedy process, so you should have a decision within a day or two.
3. After you accept the terms, the lender will work on establishing your loan. This may require some legal and tax paperwork and establishing a line of credit. However, you shouldn’t have to wait too long to get your money.

Asset-based lending is definitely a good option for startups or companies with strong cash flow and a sound business plan. It’s particularly useful if you’re looking to purchase very specific equipment, furniture, or computers that you can’t easily purchase with a bank loan. It’s also useful for large companies that don’t have time to wait for approval on their loan. Moreover, this type of lending requires very little paperwork and is generally fast, so it fits well with the startup world. It’s also much faster than applying for more traditional bank loans.