Small businesses growing at a fast pace may need additional financial support to fuel growth and expansion. If your company has pending invoices, owns valuable equipment, or has a stockroom full of inventory, you obtain funding by applying for an asset-based loan.
What is An Asset-Based Loan for Small Businesses?
An asset-based loan is a financing option secured by your company’s assets rather than cash flow and credit. The collateral could be in the form of accounts receivable, inventory, equipment and machinery, purchase orders, marketable securities, intellectual property, or commercial real estate.
Asset-based loans are an excellent choice for companies that own valuable assets but don’t have enough cash flow to qualify for an unsecured loan. The rates, terms, and total loan amount are based on the overall value of your company’s assets. Asset-based loans allow you to free up working capital tied to your assets, giving you enough liquidity to keep your business afloat.
How Asset-Based Loan Works
So, how exactly does an asset-based loan work? To qualify for one, you need to pledge your business assets as collateral for the loan. The terms and conditions are based on the value and type of the assets you pledged.
Remember that the more liquid your assets are (meaning the faster they can be converted to cash), the higher your loan-to-value ratio is. This means most lenders prefer accounts receivable, purchase orders, and marketable securities.
On the other hand, non liquid assets like commercial real estate or equipment cannot be quickly sold off for cash. Even though lenders accept these types of assets, you’ll likely qualify for a lower total loan amount or higher interest rates. Non Liquid assets increase the lender’s risk since they can’t easily encash the assets should you default on the loan.
Who Qualifies for Asset-Based Loans
Many business owners think that asset-based loans are risky for borrowers, but secured loans (like this one) make it easier for borrowers to qualify and obtain funding. With your assets acting as a security blanket, this encourages lenders to approve your application. This means that qualifying for an asset-based loan is significantly easier than applying for an unsecured business loan.
Here’s what you need to qualify for an asset-based loan from alternative lending companies such as online lenders:
- At least two years in business
- Important documents such as balance sheets, profit and loss statement, A/R and A/P aging report, business tax returns, debt schedule, and inventory schedule
- Credit and revenue requirements depend on the lender you’re going with, but for some, these factors aren’t important, thanks to the collateral
Why Choose an Asset-Based Loan
There are several reasons why small business owners rich in valuable assets should apply for an asset-based loan. Here are some of them
1. Access to a Flexible Funding Option
Businesses with cash flow and credit issues may have a hard time qualifying for conventional loan options. With assets to secure the loan, cash flow isn’t an important determining factor for lending companies. You’ll have access to a flexible financing option where you can essentially draw cash as needed and only pay interest on the funds you’ve withdrawn.
2. Credit Scores Don’t Matter as Much
Lenders focus more on the value of your assets rather than your creditworthiness. This makes asset-based loans a great option for borrowers who need funds but have less-than-stellar credit scores. However, other good options for those who are just starting out in a business and have a limited fund. These start-up businesses may consider start-up business credit cards without personal guarantee in order to expand their business capital.
3. Obtain Funding Quickly
It’s no secret that traditional bank loans take weeks or months to release funding. If you qualify for an asset-based loan, you’ll be able to receive the funds within days instead of weeks as the underwriting process is faster and simpler than conventional loans.
4. Access Funds to Grow and Expand Business
Growing businesses need working capital to fund growth and expansion efforts. Lending companies often focus on your projections and sales rather than your previous revenue. This makes it easier for business owners to access the funds they need to fuel growth efforts.
5. Less Personal Risk Involved
There are lending companies that require borrowers to sign a personal guarantee or pledge personal assets. Lenders are more interested in your business’ assets, so they won’t ask you to put up any of your personal assets as collateral.
Asset-based loans are a great financing option for those who need quick cash and have the assets to secure the loan. However, keep in mind that there’s always a risk of losing your assets. If you fail to repay the loan, lenders have the right to repossess and sell your assets to cover the loss.
But if you pay your dues on time, you won’t have a problem. The funds from an asset-based loan can support the growth of your business. Before you apply, be sure to weigh your options and assess your business to determine whether an asset-based loan is the right solution for you.