Asset-based lending and factoring, often considered last resort finance, have become attractive options for businesses that lack the credit rating or track record to qualify for more traditional kinds of funding.
In asset-based lending, which is a sort of debt-based commercial financing, lenders provide money, which is then secured by the company’s assets. Only firms with a solid track record of trade and assets are qualified.
This post is for established business owners who are curious about whether an asset-based loan may support their company’s growth. Let’s start!
What is Asset-based Lending?
With the asset financing method, businesses can get a loan to buy or rent an asset for ongoing operations and expansion. Assets on your balance sheet are used as collateral for loans in asset-based lending, a type of asset-based finance. Assets that can be used to secure a loan include accounts receivable, inventories, marketable securities, and property, plant, and equipment.
The corporate community, not consumers, is served by asset-based lending. Also called asset-based finance. It is a general phrase for asset-based lending and invoice financing. Factoring, invoice discounting, and supply chain finance are all types of invoice financing. To release cash flow for the company to employ as needed, all four of the major asset-based financing models can be utilized.
Types of Asset-based Lending
Invoice Financing
Due to its short duration, invoice discounting is one of the most popular and efficient ways to get financing. Via various invoice-based lending options, businesses can have early access to funds held in invoices and receivables due by clients.
Equipment Financing
Several factors, including the equipment’s quality and time value, affect the loan amount. If the loan is not returned, the lender is entitled to retrieve the equipment used as security. Also, businesses can use their equipment as collateral when applying for loans. In this case, the equipment value determines the loan amount.
• Real Estate Financing
Real estate is another common asset class used to get financing. Since real estate often retains its value over time, mortgage-backed loans are secured loans. High property values make it possible for businesses to raise more money.
• Inventory
Purchasing products for a future sale is possible with inventory finance. This kind of financing will use the inventory as security, just like equipment financing uses equipment. The lender may take custody of the items if payments are not made.
Asset finance services are often offered by banks or financial intermediaries. The client pays back the original asset value plus the fees to the asset financing business, just like with a standard loan. Depending on both parties, the terms and conditions typically vary substantially.
Benefits of Asset-based Lending
Asset-based financing enables businesses to access capital without performing credit checks or producing cash flow projections. It is ideal for growing a firm or safeguarding working capital in choppy markets. Some of the key benefits are as follows.
- greater funding levels than only invoice finance
- speedier working capital discharge against both inventory and property
- more latitude for cash flow financing
- flexible additional financial assistance for equipment
- A unique solution created to fit the needs of the firm.
- Financial security for small- and medium-sized enterprises (SMEs) and microbusinesses.
How does Asset-based Lending work?
Many businesses need to get loans or lines of credit to meet their monthly cash flow requirements. For example, a business could open a line of credit to guarantee that it can cover its payroll expenses even if there is a slight delay in the funds it expects to receive.
If the application company cannot show adequate cash flow or cash assets to service the loan, the lender may offer to issue the loan with the borrower’s physical assets as collateral. A brand-new restaurant, for instance, could be able to obtain funding just by guaranteeing its equipment.
Accounts receivables are mentioned first; typically, only current receivables are considered, which are those that are less than 90 days from the date of the invoice or no more than 60 days past due. The following category of assets includes stock, equipment, machinery, real estate, and intellectual property. As part of this process, field inspections will be conducted at your company to assess the number and quality of its material and financial assets. The field inspection and inventory evaluation decide the qualifying collateral and the advance rates against it.
An asset-based loan’s terms and conditions are dependent on the kind and worth of the assets offered as collateral. Lenders want highly liquid collateral, such as assets that are easily converted into cash, in case the borrower falls behind on payments. As loans backed by tangible assets are often perceived to be riskier, the maximum loan will be considerably less than the book value of the assets. Different interest rates are imposed according to the applicant’s credit history, cash flow, and company term.
Example of Asset-based Lending
Consider a scenario in which a business requests a $200,000 loan to grow its operations. The lender may approve a loan for 85% of the face value of the highly liquid marketable securities that the firm pledges as security on its balance sheet. The lender will be ready to finance $170,000 if the firm’s securities are valued at $200,000. If the business decides to put fewer liquid assets, such real estate or equipment, up front, it could only get offered $50,000 of the loan it needs, or $100,000. The discount in both situations is meant to cover the costs of turning the collateral into cash as well as any potential loss in market value
Pros & Cons of Asset-based Lending
Even if this loan appears to be an excellent idea on paper, more information must be obtained before making a final decision. This is a summary of some asset-based lending pros and cons:
Advantage of Asses-based Lending
- Asset-based loans are simpler to get. The most obvious advantage of asset-based loans is that they are extremely simple to acquire, even if your personal or business credit is less than ideal.
- Asset-based loan applications are simple, quick, and don’t need a lot of paperwork. You only need to demonstrate that you satisfy the minimal requirements, and you can get your money in a matter of days.
- Asset-based lending provides rates that are comparable to those of other loan kinds since collateral is used. By offering collateral, you might increase the likelihood that your loan will be repaid on time by the lender. If your credit is excellent, your interest rate can even be cheaper. Before filing an application, attempt improving your credit scores for both your personal and business.
Disadvantage of Asset Based Lending
- Be sure you can afford the terms that your specific lender is recommending. Otherwise, if you default on the loan, the lender may seize your collateral. If this item is important to you or your business, take every precaution to prevent losing it.
- As the total value of your loan is based on the value of your assets, there is a maximum amount you may borrow. You’ll need to go elsewhere if you need a larger sum of money and don’t have anything valuable you can use as leverage with. This approach is effective for finding quick financial fixes, such as assisting business owners that want a little additional operational income
To evaluate if a business qualifies for asset-based loans, a lender will consider the following factors:
- Lenders may review the company’s financial records as part of their research on the borrower.
- The value of the borrower’s assets must be sufficient to repay the loan in full, plus an extra sum to pay the costs involved in turning the assets back into cash for the lender.
- The value of the assets and how easily they may be turned into cash in an emergency will be determined by the lender.
Apply for Asset-based Lending
A typical asset-based financing agreement functions as follows:
- An SME seeks an asset-based business loan from a lender.
- Assets are used as loan collateral, such as machinery, equipment, or accounts receivable.
- The lender offers quick access to funds with pre-established terms for repayment.
Frequently Ask Question
Assets on your balance sheet are used as security for loans in asset-based lending, a type of asset-based financing. This includes tangible assets like stocks and debts.
Lending money under a contract secured by assets is known as asset-based lending. Inventory, accounts receivable, equipment, and other items that belong to the borrower may be used as collateral for an asset-based loan or line of credit. The corporate community, not consumers, is served by asset-based lending.
In general, asset-based financing may be a fantastic strategy to help your business. You may access funds, free up cash flow, and control risk by utilizing the equity in your assets. You may use all of this to expand your business more rapidly and profitably.
Asset-based finance that prioritizes your company. The Apollo Capital Group company in New Jersey, USA provides affordable financing options for small enterprises.
Faster financing and approval times compared with traditional bank loans are benefits of asset-based lending. Asset-based loans offer higher interest rates than traditional bank loans, and you run the danger of losing your collateral if you can’t make your payments.
