What is Asset-Based Lending?
Asset-based lending is a loan process that uses a business’s existing assets as collateral. This type of lending can provide your company with the credit and flexibility needed to address your goals.
Should Your Business Get an Asset-Based Loan?
Asset-based loans are used by businesses that require more capital to operate or grow. Often cash flow problems arise due to the rapid growth of a company. This type of loan can help sustain and ensure continued success. At other times, a company may need an infusion of cash to get over a financial hump.
This kind of financing can help address a variety of objectives, such as:
- Business expansion and growth
- Debt refinancing
- Seasonal needs
How are Asset-Based Loan Amounts Determined?
Banks determine the amount of money you can borrow based on your assets’ market value. The following are types of tangible resources banks will use to secure this type of loan:
- Accounts receivable
What Qualifies Your Business for an Asset-Based Loan?
Lenders prefer liquid collateral to physical equipment. You will need to provide detailed financial statements to the bank to prove you have a successful business with an expected future profit. The ability to create revenue in the future will be used as an assurance to gain access to capital right now.
Your business must have accurate reporting systems and a good track record of consistent income to secure your loan. It is essential to demonstrate that your company is profitable.
Interest rates for asset-based lending aren’t as high as other loan types, as you are securing the money with your assets. The collateral provided decreases the bank’s risk. As a result, it might be easier to qualify for this type of loan over an unsecured loan.
What is a Loan-to-Value Ratio?
Banks will advance funds based on a percentage of the assets’ value. The loan is the amount of money a lender is willing to loan. Value is the worth of the collateral given for the loan.
You can not secure a new loan with assets that you have pledged as collateral for a different loan. You must not have any substantial accounting, tax or legal issues. If these concerns are present, a lender will likely not risk loaning money to your business.
What Happens if Your Company Defaults on Your Loan?
If you default on your loan, the bank will take possession of the inventory you used as collateral. It is crucial to ensure that the items you are purchasing will convert into profit down the road.
Asset-based lending can be a valuable financing alternative for your company to maximize borrowing capacity.