If you own or operate a business, you’ve probably heard the term “asset based lending” before. Maybe you’ve been approached by an asset-based lender, or perhaps you’ve considered using one of these lenders to help grow your business.
Asset-based lending is a method used by private money lenders to provide funding to companies that have assets but don’t meet the minimum requirements for a standard bank loan.
If this type of financing is new to you, however, you might be wondering what it is exactly, and how it works. This article will give you an overview of the main principles of asset based lending, who can benefit from these types of loans, and how they work.
What Is Asset-Based Lending?
Asset Based Lending allows business owners to borrow money secured by collateral, such as inventory, accounts receivable, real estate, and equipment. Basically, business assets like manufacturing equipment, vehicles, land, or a stockpile of inventory can be used as collateral.
However, note that assets that are not fully owned by the business such as mortgaged land or vehicles whose car loans aren’t fully serviced can’t qualify as viable collateral.
All in all, this type of loan can be a good option if you are having trouble obtaining traditional bank financing because of bad credit or seasonal cash flow issues. Let’s break down how it works.
Asset-based lenders extend credit based on the value of your collateral. The lender will issue a line of credit (often up to 75% or 80% of the value of whatever you are borrowing against) and advance your funds as you need them.
The structure is similar to a home equity line of credit in that your line has a maximum amount but you draw against it as needed. However, asset-based loans are typically more flexible than traditional lines of credit because they don’t require regular monthly payments and they take the value of your assets into account.
Benefits of Asset Based Lending
Here are some of the leading benefits of asset-based lending.
Quick Access to Capital from Private Money Lenders
The biggest advantage of this type of loan is that it allows the business owner to get access to funds quickly, which can be very helpful in certain situations.
For example, if your company has an opportunity for a large order but does not have enough cash flow at the moment, asset based lending makes it possible for you to take advantage of the opportunity without having to worry about getting approval for a traditional loan or line of credit first.
Flexible Terms and Renewal Options
Asset-based loans are typically more flexible than traditional bank loans, so you can draw on more capital as and when you need it. The amount of capital you receive will depend on the value of your assets, and the type of loan you choose.
Expand Without Diluting Ownership
Asset-based lending is often used by small businesses to finance growth or acquisitions without diluting equity ownership. It also appeals to companies with low credit scores, since the lender’s risk is tied to the value of the assets rather than the borrower’s credit history.
To Sum It Up
There are many ways to grow your business. You can bootstrap it, receive funding from a venture capitalist, or get a bank loan. But what if none of those options work for you? What if your business doesn’t have enough revenue yet to qualify for a loan, but you need immediate capital to increase revenue and make sales?
If you do find yourself in such a scenario, the information provided in this column should compel you to consider asset-based lending as a viable alternative to business financing.