Should You Consider Asset-Based Lending for Your Business?
As a business owner, you may have heard of asset-based lending in the past, but do you really know what it is or what potential benefits it offers your business? An asset-based loan is a loan backed by collateral rather than being based on your credit rating. Before choosing asset-based lending for your business, it is best to figure out if it is a good fit for you.
Understanding Asset Based Lending
The total amount of money a lender will provide for an asset-based loan is determined by the asset you are using. The asset is used as collateral that guarantees the loan will be repaid. Approval for this type of loan does not depend on your credit score; instead, it is based on the asset’s value. If you default on the asset-based loan, the lender has the option to repossess the asset you used as collateral.
An asset-based loan is a smart option for acquiring business financing without having to have good credit. Usually, the loans are secured by your current inventory, accounts receivables, real estate, or equipment.
The Asset Based Lending Process
Asset-based lending focuses on the asset or set of assets that are used as collateral. This may be equipment you own, your inventory, unpaid invoices, or real estate. After you put an asset up as collateral, the lender you choose will provide you with a loan that’s worth a percentage of your asset’s value.
Most lenders want to offer bigger loans because the cost for monitoring the loan is the same, no matter the capital amount borrowed.
Asset-Based Loans as Revolving Credit
In some situations, like when the loan is based on your outstanding invoices, you can structure the asset based loan as revolving credit. Every month or week, the lender will determine the inventory and accounts receivable amount, and this will be used as a borrowing base. In turn, this determines your total borrowing capacity. The advance rates will be established for every type of collateral you use for the loan you receive.
Asset-Based Lending and Your Business
Asset-based loans aren’t right for all businesses, but they can be beneficial in many situations. It is important to consider your situation to ensure that this type of loan is right for you. If you choose this lending option, it is important to find a quality lender, which will ensure you get the right terms for your needs.