The Basics of Asset-Based Lending
Sometimes too many choices can be overwhelming. When it comes to deciding on the right type of loan for your business, you may feel daunted by all of the pros and cons you have to weigh as well as all of the fine print you have to read. To make things simpler, here are the basics about one type of financing: asset-based lending.
What It Is
Essentially, this is a method of gaining financial support by offering your physical assets as collateral. Some of the common choices for collateral include inventory, machinery and accounts receivable. In the case of default, the lender would have the right to seize and sell those assets that are placed on the line. However, one of the primary advantages to this type of lending is that lenders are more willing to lend you money because they are given access to tangible assets to mitigate for risk. Consequently, it’s often easier and quicker for you to qualify for these types of loans. The length of repayment plans usually depends on what you use as collateral. For instance, invoices may allow for a few months, whereas equipment could give you five or six years, based on its “life expectancy.” Asset-based loans are often used to increase cash flow and working capital.
How It Works
To start, your lender determines the market value of your assets and based on that amount, decides on the amount of capital that will be lent to you. Generally, you can borrow around 50% of the value of your equipment or inventory and about 75% to 85% of what your accounts receivable are worth. Keep in mind that lenders are attracted to assets that can easily and quickly be liquidated since they don’t want the hassle of waiting for a potential buyer. Also, you get to choose between two primary types of loans: lines of credit and business term loans. With lines of credit, you’re allowed to just utilize the amount of money you need and only pay interest on that. On the other hand, with term loans, you’ll pay back the sum amount, plus interest, over a specified period of time. Remember that with either type of loan, you’ll need to own the asset outright for it to qualify as collateral.
Now that you know a few of the basics of asset-based lending, you can compare it with other types of loans and find the best fit for your business.