If you own a small business, you're likely used to the frequent cash crunches that plague entrepreneurs. Unlike a corporate CEO, when you own your own business, all of the responsibility for raising capital falls on you alone. Small business owners are often at a disadvantage when it comes to getting approved for a traditional bank loan. This is where using your business assets as collateral for a loan can be a huge help. Taking advantage of this lending arrangement can help you keep your business going during tough economic times.
What is Asset-Based Lending?
True to its name, asset-based lending refers to financing that is guaranteed by a company's assets. Nearly all businesses have valuable assets such as equipment, computers, or vehicles. Asset-based lending allows a business owner to use these assets as collateral to secure a business loan. Depending on the lender, you may also be able to use some of your flexible assets such as inventory or accounts receivables as collateral for the financing. Generally, these loans are used for short-term purposes to expand a business, cover an unforeseen expense, or pay off a higher-interest debt.
How is Asset-Based Lending Different from Other Loans?
The major factor that separates asset-based lending from traditional business loans is that you don't have to come up with any personal collateral. Typically, a business owner who applies for a lending arrangement from a bank has to raise cash from his personal account or guarantee the loan with his own assets such as a residence or a piece of property. Asset-based lending, though, allows you to keep the financing separate from your personal life by making use of your business assets alone.
What are the Advantages of Asset-Based Lending?
Asset-based lending offers several advantages for entrepreneurs. First of all, if you apply for asset-based lending, you won't need a high credit rating. This factor often disqualifies business owners from getting approved for bank lending, but it won't stand in the way of getting an asset-based loan. Another advantage of an asset-based loan is that you can continue to use your assets while they serve as collateral. On the other hand, when you use cash to guarantee a loan, you're unable to use it in the course of your business. Asset-based loans are also processed rather quickly, allowing you to get your increased capital faster than you would with a traditional business loan.
Asset-based lending can be an extremely useful financing arrangement for small businesses. Applying for this type of loan can open up new sources of financing to help your business thrive.