Asset-based lending can be a great option for businesses who have been turned down for a loan by a bank, or who need money quickly and do not want to go through the hassle of getting a loan approved.
This can help you free up some cash flow giving your business the working capital it needs to grow.
In this guide, we will discuss what asset-based lending is, how it works, and the pros and cons of using this type of financing. We will also provide tips on how to qualify for an asset-based loan and recommendations for where to find the best rates.
What Is Asset-Based Lending?
Asset-based lending is a type of financing in which businesses use their assets as collateral to secure a loan. The value of the assets is used to determine how much the business can borrow. It is a popular financing option for businesses that have difficulty qualifying for traditional loans, or who need money quickly.
Moreover, asset-based lending is a flexible financing option since businesses can use a variety of assets as collateral, including inventory, receivables, equipment and real estate.
It is important to note that asset-based loans are a form of secured loans, in which the borrower pledges assets to guarantee repayment of a loan should they default. With an asset-based loan, the lender has a lien on the company’s assets and can seize them if the borrower defaults on the loan.
How Does Asset-Based Lending Work?
This works by using the value of the borrower’s assets as bond for the loan. The lender will appraise the value of the assets and use that amount to identify how much the business can be lent. The loan amount can typically be up to 80% of accounts receivable, and 50% of inventory net liquidation value.
For example, let’s say a company has $100,000 in inventory and $50,000 in receivables. The lender appraises the inventory at $80,000 and the receivables at $40,000. The company can qualify for a loan of up to $75,000.
If the company needs more money, they can pledge additional assets as collateral. The downside is that if the company does not have enough assets to cover the loan amount, they will not be approved to draw additional capital.
Another thing to keep in mind is that asset-based loans are typically short-term financing options with terms of one to two years.
The Pros and Cons of Asset-Based Lending
There are several advantages and disadvantages of asset-based lending that businesses should be aware of before they apply for this type of financing.
- Asset-based lending can be easier to qualify for than traditional loans since the loan is based on the value of the collateral, not the creditworthiness of the borrower.
- It can provide a quick source of funding since lenders can approve loans in as little as 48 hours.
- It is a flexible financing option since businesses can use a variety of assets as collateral.
- It can be a good option for businesses that have difficulty qualifying for traditional bank loans.
- Asset-based loans typically have higher interest rates than traditional bank loans.
- The borrower can lose their assets if they default on the loan.
- It is a short-term financing option, which means businesses will need to find another source of funding when the loan term expires or renew their agreement.
Tips for Qualifying for an Asset-Based Loan
There are a few things businesses can do to increase their chances of qualifying for an asset-based loan.
First, they should have a strong understanding of their assets and how much they are worth. This will help them determine how much they can borrow.
Second, they should have a good relationship with their lender. Lenders are more likely to approve loans for businesses that they have a good relationship with.
Third, they should be prepared to provide collateral. The more collateral the business has, the better their chances of qualifying for the loan.
Finally, businesses should research different lenders to find one that is a good fit for their needs.
Asset-Based Loan Rates
The interest rate on an asset-based loan is typically higher than the interest rate on a traditional loan. This is because asset-based loans are considered to be higher risk.
The interest rate will also vary depending on the type of asset being used as collateral. Say, receivables are typically considered to be low-risk collateral, while inventory is considered to be higher-risk.
Asset-based lending can be a quick and easy way to get funding, but it is important to be aware of the risks involved. Businesses should also be prepared to provide collateral when applying for an asset-based loan.
Therefore, it is important to understand how it works and what the pros and cons are before applying for a loan.
When done correctly, asset-based lending can be a great financing option for businesses.