How Does Asset-Based Lending Work?
What is asset based lending? In simple terms, this funding resource involves obtaining loans based on assets held by the business, such as accounts receivable and collateral-worthy inventory. Business owners use the promise of future revenue as collateral in order to secure money they need immediately. Lenders offering these loans provide the funds at a percentage rate agreed upon by both parties. The percentage often falls between 70 and 80 percent of the business’ eligible receivables and around 50 percent of their finished inventory.
There are many lenders willing to offer asset based lending. The loans are often available through both banks and independent financial companies. The trick, for small business owners, is to find lenders who are willing to accept the higher risk levels associated with granting loans to small or fledgling companies. Many asset-based lenders prefer working with larger loans because the payout associated with the risk is better, but the costs for monitoring the loan are the same as with a smaller loan.
Small business owners can secure these loans with a bit of effort. For example, a history of good financial reporting, accurate financial statements, a consistently-selling inventory, and an established history of paying bills will put small businesses in a great position for obtaining loans. These tactics assure potential lenders that the business owner will repay the funds and that a beneficial business relationship is possible on a long-term basis.
Naturally, there are some drawbacks to asset based lending. For example, if a business has struggled with customers who don’t pay their bills regularly or on-time, the business may have a hard time obtaining the asset-based loan. These loans also tend to cost more than traditional loans. The interest rates involved can vary a great deal and some lenders apply additional fees to the overall cost of the loan. Some banks may also require a personal guarantee from the business owner.
However, asset based lending offers capital when businesses desperately need it. This quick source of cash may be exactly what a new business needs to support rapid growth during a vulnerable period. This lending type could also be an appropriate source of funds when a business faces a financial hurdle or is in danger of facing a growth slump. Manufacturers and distributors find these loans particularly valuable as they face seasonal fluctuations. The loans may also be used to secure acquisitions that aren’t regularly available.
Asset-based loans could be an important resource for small or new businesses. The unique source of funding is a solution for many of the financial obstacles business owners face. Contact us at AI Capital Funding to learn more.