A Guide to Asset-Based Lending
Your company will have different financial needs at different times throughout its life and finding the right fit for every situation can involve a lot of research. When you have a large number of products or equipment, but not a lot of money for bills or different supplies, asset-based lending can be the best bet. Before you get started finding a lender, it is important to know what this lending type is, how it works and how it can benefit your business.
What Is It?
This type of lending is a loan secured by using your assets as collateral, which can be accounts receivables, inventory or equipment. It is commonly used by companies with little or poor credit history and can be used to help bolster your credit. You can either set up this lending as a revolving line of credit or a term loan, depending on your needs.
How Does It Work?
With asset-based lending, you will be able to borrow a percentage of the market value of the items you use for collateral. This amount is usually 80% of receivables and half of your equipment or inventory, so the lender will be able to recover costs if you default and your collateral sold to pay the loan. Qualifying for a loan secured with assets is usually easier for businesses with poor or no credit because these loans are less risky for the underwriters.
What Are the Benefits?
The benefits of this type of lending include having the working capital you need to grow your business, being able to qualify with less than stellar credit, and putting your assets to work for you during the off season. For example, if you own a retail shop and have an inventory of seasonal items that do not move during the rest of the year, then you can use that inventory as collateral on a loan. You can use this for working capital, to expand your company or even to buy another business.
Asset-based lending can help you get the working capital you need without having to take out a traditional bank loan. This type of loan uses your inventory, equipment or receivables as collateral for either a revolving line of credit or a term loan. Because this is a secured loan, the lenders will focus more on the market value of your collateral than on your credit, which makes this a good option for businesses with a poor credit history or which have not been in business long enough to have one.
