Asset Based Lending: The Definitive Guide
What are Asset-Based Loans?
Asset based loans are, as the name implies, based on assets such as company inventory and accounts receivable. These assets are used as collateral on loans, essentially meaning that you place the future gains of your company up against the immediacy of the loan money. Most asset based lenders work on a percentage of the collateral assets that they forward to the business in the form of a loan. Most of these loan ranges are between 70-80 percent of receivable collateral, and 50 percent of the finished inventory.
How to Get an Asset-Based Loan
Many financial service companies offer asset based loans, such as the Commercial Finance Association. The difficulty comes in trying to find a line of credit for small businesses, as many asset based loans are based on the established return of the investment, and a younger business is a riskier investment. However, if your company has consistent financial statements, well organized reports, and a good inventory turnover, you are in a good position to get approved for an asset based loan. Preparation is key when approaching a company for an asset based loan. You should have your business’s financial information prepared to show that your business is trustworthy.
Asset Based Loans: Pros
Asset based loans provide growth capital for businesses that are in the middle of a turnaround, or are under-capitalized. They can also act as a financial injection to ensure the company’s growth over a longer period of time. Asset based loans are incredibly useful for companies that have a seasonal turn around, from manufacturers to service companies, as capital can ebb and flow depending on the industry need.
Asset Based Loans: Cons
Securing an asset based loan is dependant on the quality of your company’s receivables and on the reliability of your customers. Many times, small businesses or individuals are not eligible for asset based loans due to the risk of investment. Asset based loans are also more pricey than other loans, with a higher interest feel as well as additional “audit” fees. Larger firms may also request a personal guarantee on the loan. Many asset based lenders will collect payments directly from your customers, which means another company is in charge of your business’s capital.
To find out more about asset based loans for small business, as well as other ways to gain capital and manage a small business, look no further than Ironhorse for your in depth guide to managing a small business.