An asset based loan is made based on assets that are used as collateral. Specifically, inventory is used to secure the loan. In some instances, when you receive an asset-based loan you are leveraging future revenue in order to access money now. Generally speaking, a lender that provides asset-based loans will provide an advance of funds based on a percentage of your secured assets. The percentage is determined in advance and usually involves 50% of finished inventory and up to 80% of eligible receivables.
There are a variety of different lenders that offer asset-backed loans that include banks, finance companies and independent investors. Research is required to find a lender that’s willing to meet your financial needs based on your unique situation. If you are a small business owner looking for financing, it’s likely a good idea to seek a lender that can provide a line of credit. Many asset-based lenders focus on providing large loans because of the administrative effort required.
Advantages of an Asset-Based Loan
In some ways, getting approved for an asset-based loan is similar to getting approved for a traditional loan. Your company must be in good financial standing, have good recordkeeping practices and have consistent accounts receivables. As with most lending institutions, there’s a greater chance that you will be approved for an asset-based loan if the financial information that you provide is accurate and detailed. There’s an even greater chance of approval if your financial statements have been prepared by a professional accountant. It’s simply of matter of making sure all of your ducks are in a row.
If you require an immediate source of capital, an asset-based loan might be the best option, depending on your situation. There are a variety of reasons why a business simply needs cash in order to get through a difficult season. For instance, a business might apply for an asset-based loan because they are unable to fulfill payroll; perhaps there was an emergency expense. The types of businesses that are most likely to apply and receive an asset-based loan include service companies, distributors and manufacturers. This is because they sometimes run into slow seasons, but would otherwise have a positive cash flow. Another common reason why companies use asset-based loans is to finance acquisitions and new ventures.
Disadvantages of an Asset-Based Loan
An asset-based loan isn’t a sure thing and there are downsides. In fact, asset-based lenders will assess your receivables and make a decision based on the payment history of your customers. There’s a chance that the lender will not consider receivables from your small business or individual customers. Some lenders only consider customers who pay in less than 60 days. If you do qualify for an asset-based loan, there’s a chance that a personal guarantee will be required.