Entrepreneurs face an onslaught of expenses when running a profitable venture. Having immediate access to funding is necessary to keep your business going, and one of the best ways to secure financing is to apply for an asset-based loan.
As the name suggests, an asset-based loan is a type of financing secured by your company’s assets, such as accounts receivable, inventory, commercial real estate, marketable securities, intellectual properties, and more. Lending companies will advance funds based on the value of your assets. And once you receive the funds, you’ll be able to use the funds for almost any business purpose.
If you’re still on the fence, here’s a list of how your company can benefit from an asset-based loan:
Since your business’ assets secure the loan, asset-based lending is less risky than unsecured loans (a loan NOT secured by an asset). As a result, you’ll qualify for lower interest rates.
For instance, loans secured by accounts receivable are less risky than a loan secured by real estate. Lenders may find it more difficult to liquidate property compared to accounts receivable.
Compared to the qualification process for business lines of credit, an asset-based loan is easier to qualify for. Unlike a business line of credit, lending companies are more concerned with your assets’ value than they are with your credit rating. As long as you have valuable assets, there’s a great chance you’ll qualify for an asset-based loan.
The application process only takes a few days – shorter if the business is profitable and has reasonable financial controls.Asset-based Lending applications and funding delivery are approved faster than bank loans which could take months before you receive funding.
Accounts receivable are the easiest assets to leverage, especially if they’re from creditworthy customers as these invoices can easily be converted into cash. Most lending companies prefer to finance accounts receivable that pay within 60 days. To further lower your risk, you can use inventory and equipment as additional collateral.
Most companies that apply for asset-based loans are in their intermediate growth phase. This means that they have outgrown invoice factoring, but they still won’t be able to qualify for traditional bank loans.
Applying for an asset-based loan lets you build and improve your track record with lending companies. You can also use it to build your credit rating by working with lenders that report your payment history to the major credit bureaus. Just make sure to pay your dues on time to improve your credit score.
Once you’ve established your credit rating and your track record with your lender, you’ll be able to apply and qualify for a less expensive loan product.
Asset-based financing facilities mostly provide great flexibility, especially with fast-growing companies. Although there are still a few restrictions ensuring that you spend the money is solely for business purposes, there is a great deal with the financial line being tied in with the value of your assets. Meaning if your accounts receivables and other collateral have grown in value, then your financial line would also increase as your sales grow. This will mostly benefit companies that are growing quickly that need additional funding.
Even though your assets are placed as collateral, you still own them. The assets you collateralized are still under your name as long as you continue to pay your dues. The lending company will only repossess your assets if you default on the loan. As long as you are up to date with your payments, you won’t have anything to worry about.
Improved liquidity is another benefit you can get from using asset-based financing as it frees up the capital tied to your assets. If used properly, it can help you achieve financial stability and predictable cash flow.This can help growing companies gain financial stability whenthey’re strapped for cash.
Finding a suitable financing solution for your business requires thorough planning and research. Understanding your options and how they can affect your business is a crucial part of finding a loan that works best for you. Seasonal businesses and capital-intensive companies benefit the most from asset-based financing.
Before applying for this type of loan, assess your business to see if your assets are valuable enough and look for a reliable lending company.