More and more businesses are popping up in every corner, but many have issues with sustainability, growing too fast, or don’t have a desirable credit rating. That’s why traditional banks often turn them down for loans. Besides that, lenders are more careful when taking risks due to financial crises.
Unfortunately, businesses with different lines of credit can find it challenging to get funds from banks. This is because banks won’t want you to have extra credit beyond your limit, hindering your business’s financial growth.
So if you’re short in working capital and your business needs financial assistance, consider financing options like asset-based lending (ABL), which is a viable option if you’re strapped for cash.
In this article, we’ll dig deeper into the difference between traditional bank lending and asset-based lending and find out which option will work best for you. Let’s take a look!
What are the Biggest Differences Between Asset-Based Lending and Traditional Lending?
Asset-based lending gives you a more flexible approach to financing a business that wants to expand and grow, which is all based on the collateral you put up for your loan. On the other hand, traditional bank lending offers you money to borrow based on your business’s future cash flow.
Generally, ABL advance rates range from 70 percent to 90 percent, and you submit your payment to the lender when funds are collected. After that, the lender will provide you with a balance, exclusive of its fees for the loan and for managing the process.
An asset-based loan follows a revolving line of credit approach that refreshes every time you pay collateral. With that, receivables are the largest proportion of collateral for ABLs because they have more liquidity.
How Does the Whole Lending Process Work?
Asset-based lenders spotlight the quality of the collateral rather than your cash flow or credit rating. Here, they want to ensure that the creditor can make payments and track their record — this will determine their creditworthiness. On the other hand, traditional bank lenders are more constrained by standard protocol and more.
Obviously, banks tend to say no to companies with more than four to one debt-to-capital ratios. While independent asset-based lenders are used to constraints, giving them more reason to finance small businesses with small capital.
What Do You Get from Asset-Based Lending?
- ABL provides you with immediate and ongoing cash flow liquidity that could help improve your company’s working capital. This includes the ability to meet seasonal requirements, materials and supplies, payroll, and more;
- Although bank lending processes can be lengthy, asset-based lending requires less time to process. With that, you get a more flexible schedule, allowing you to work on your business’s finances right away;
- Since asset-based loans focus on the quality of your collateral, fewer financial covenants are required from you, unlike in traditional bank lending;
The Bottom Line: When It Comes to Funding Your Business’s Capital, Which Lending Option Should I Get?
Perhaps you’re here because you need help with funding your business. It goes without saying that asset-based lending is a superior option if you’re really tight on cash and have quality collateral to submit. With this, you’ll get flexible payment terms, allowing you to maintain healthy cash flow in your business until you repay your lender.
How Can We Help You?
If you’re looking for financial services, you’ve come to the right place.
Porter Capital offers working capital solutions to various businesses all over the country and in different industries. As a direct lender and factoring company, we have provided more than $6 billion in funding since we started. Our services include asset-based lending, invoice financing, dip financing, working capital loans, and more.
Learn more about how we can help your business today!