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!
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What Is Asset-Based Lending?
Asset-based lending lets you put up your non-monetary assets as collateral for a loan, such as property, antiques, and other high-value possessions. Commercial ABLs often use part of their business, whether it’s a building they work out of or a share of the brand itself. This can be an excellent option for businesses that are just starting out or have come across sudden unforeseen circumstances that require them to come up with a large sum of cash they don’t have.
Throughout the loan’s duration, your lender will legally own the collateral you put up, and if you don’t pay it off, asset-based lenders can retain your collateral forever. However, if you’re confident in your ability to pay off the loan, ABLs often come with benefits over traditional loans, like more flexible terms and lower interest rates. Partnering with top asset-based lenders like Porter Capital can ensure you get the best deal for your collateral.
What Is Traditional Bank Lending?
Traditional bank lending is also known as bank financing, and it’s likely the loan type you’re most familiar with. These loans are typical for newer businesses looking to finance their production, equipment, and services until they can stabilize their profits, but even established businesses can qualify for them. The more history your company has, the better opportunity it has of being approved.
With traditional lending, you won’t have to put up collateral as you do with ABL unless your lender requests it, but you generally do so at the cost of higher interest rates. You’ll also need to have decent credit for a good chance of approval — if your business does not, then it may fall to your personal credit score instead. The amount you’ll receive in a traditional bank loan is determined by your expected revenue and how much you can feasibly pay off during the loan period.
Differences Between Asset-Based Lending and Traditional Lending?
A crucial distinction between asset-based lending and traditional lending lies primarily in the underpinning of the loan. Asset-based lending is highly flexible and notably suitable for businesses eager to scale. This lending style relies entirely on the collateral you can supply, typically tangible assets like machinery, real estate, or your business’s outstanding invoices.
Contrastingly, traditional bank lending is more conventional and sets the loan amount based on your business’s expected future cash flow. This method appeals to a wide range of businesses, regardless of the industry, providing they can demonstrate strong financial performance and potential for growth.
Typically, asset-based lending offers advance rates varying from 70 to 90 percent of the collateral’s value. When your customers pay their invoices, you forward this money to the lender. The lender then presents you with an updated balance, after deducting their fees for the loan and the handling of the process.
A significant feature of asset-based lending is its revolving structure, which means your available credit oscillates as you make payments against the collateral. You’ll find that short-term assets like accounts receivable often account for the lion’s share of the collateral used in asset-based lending. The reason behind this is their liquefiable nature, allowing the business to convert them into cash quickly, thus posing a less risky proposition for the lender. It’s a process that provides businesses with crucial cash flow, especially those with significant money tied up in accounts receivable or inventory.
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;
How Asset-Based Lending Can Help in Business Expansion
Asset-based lending can fuel business expansion by unlocking the wealth tied up in your tangible assets. Often, companies eager to grow find themselves in need of accessible cash but are cash-poor due to investments in equipment, inventory, or accounts receivable. Asset-based lending allows these companies to raise capital while avoiding the need to sell off assets.
This form of lending provides a flexible solution that scales with your business. As your receivables or inventory increases, so does the amount you’re eligible to borrow. This scalability makes it an excellent choice for businesses undergoing expansion, as the extra funds can be utilized to hire more staff, invest in new equipment, increase inventory, or even acquire other businesses.
The Role of Asset-Based Lending in Improving Business Financial Health
Asset-based lending can also be instrumental in enhancing your business’s financial health. One key benefit is the improvement of cash flow. Many companies often have a high proportion of their capital tied in accounts receivable or other assets. By using these assets as collateral, companies can access immediate funds instead of waiting for customers to pay invoices, thus alleviating cash flow pressures.
This lending option can also serve as a financial lifeline during times of distress. For instance, it might bolster a business experiencing slower sales cycles, unexpected expenses, or needing to negotiate a tough financial period.
Also, businesses facing difficulties securing traditional bank loans due to less-than-stellar credit ratings can find refuge in asset-based lending as these loans are collateral-based, focusing more on the assets than the business’s credit history.
Finally, the revolving nature of asset-based lending can facilitate better capital management. Companies can borrow exactly what they need, when they need it, which helps prevent them from taking on unnecessary debt while ensuring growth opportunities are sufficiently funded.
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.
Porter Capital Can Help With Our Lending Services
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!