Asset based lending is an alternative form of financing. Even if your business has had trouble qualifying for a traditional loan from a bank, you may be able to get this type of funding. Here is some basic information to help you decide if a loan against your assets is right for you.
How Asset-Based Loans Works
As its name suggests, asset based lending involves financing taken against a business’s assets. A company that needs cash, either to expand or to weather a cash-flow shortage, will often seek this type of lending when a bank line of credit isn’t available to them. To get funds from an asset-based lender, your business will most likely need to have substantial collateral. Your assets, such as accounts receivable, inventory, equipment, real estate and materials, will secure your loan in this type of deal. You retain ownership of your assets unless you can’t make your payments. If that happens, the lender can take the collateral. You can have a loan based on one or a combination of assets.
What Are the Costs Involved?
Lenders offer different deals, so you should shop around to get the most you can for your assets. A lender will advance you an amount that equals a percentage of the value of your collateral. For example, accounts receivables typically net 70 to 80 percent of their total. Interest rates for this type of lending are higher than for a small business loan from a bank. You might also have to pay fees to pay for the audits of your business that a lender generally conducts.
Is an Asset-Based Loan Right for You?
If you need a quick infusion of cash but can’t get a line of credit from a bank, then an asset-based loan might be right for you. Asset-based lenders often work with businesses that manufacture products or sell to other businesses. If that describes your company, than you may be an ideal candidate. Even if you’re a smaller business, you might be able to get this type of funding if you shop around. The higher fees associated with asset based lending can be justified when the cash you acquire helps you grow your business, pay creditors or hire staff. However, you’ll need to weigh the risks and benefits since you could lose your collateral if you’re unable to repay the loan.
Asset based lending isn’t right for every business, but it can help those with less than perfect credit get the cash they need to keep operating. You may be able to find a deal that works for you by comparing the rates, fees and terms of several lenders.