Asset-based lending is quickly becoming a popular way for small business owners to get fast access to cash for their companies. Since many companies have taken a credit hit due to the tight economy, asset-based lending has grown in popularity because it doesn't require a good credit history. On the other hand, this type of financing uses a company's assets as collateral for a loan or a cash advance. If you're interested in understanding asset-based lending, here's a primer on this type of business financing.
What is Asset Based Lending?
Essentially, asset-based lending is financing that is offered to companies based on the valuable items the company owns. Rather than putting up cash or credit as collateral, business owners use their inventory, accounts receivable or valuable equipment to secure the loan funds. This means that company owners who apply for asset-based lending don't need to have a good credit rating. They can use the value of their businesses as security to get the funds they need. Unlike traditional loans, however, asset-based lending typically has very high interest rates and fees. Most asset-based lending is done in the form of asset-based loans or invoice factoring.
Asset Based Loans
An asset-based loan is a financing plan that is secured by your company's assets. This type of financing is typically offered to those who have valuable company equipment that is already paid for. Other companies use their inventory stores or their outstanding account receivables as the basis for their loans. The amount of money you can receive depends on the age, value and amount of your collateral. If you have a large number of old account receivables, you may only qualify for 30 percent of your outstanding balance as a loan since the likelihood of collection is low. On the other hand, if your business owns several valuable pieces of new equipment you could receive up to 80 percent of their value as a loan.
Invoice factoring is another asset-based lending option for businesses. Companies that use this program sell their account receivables to a third-party company in order to receive the bulk of the outstanding balance as an upfront payment. The invoice factoring company then becomes responsible for collecting the receivables. After the payments are collected, the business owner may receive the amount that's left over after the necessary fees and charges are deducted.
If you decide to accept asset-based lending, do your homework and shop around for the best possible interest rate or fee schedule you can find. If you take the time to understand asset-based lending you can use this financing option to provide short-term funding for your business.