Do you need additional funds for your business? If you need to keep up with wages or are planning an expansion, you may need extra resources. An asset-based loan can provide the necessary working capital. You can use the money to grow your business and repay the loan over time. Business owners can select from various financing methods. We will share the details behind asset-based loans so you know if this financing is right for you.
What is an Asset-Based Loan?
Asset-based lending uses your assets as collateral to finance a loan. If you fall significantly behind on the loan, the lender can take the loan’s underlying assets as collateral, but lenders work with business owners to avoid that scenario. Business owners can select from various assets and make sure specific assets do not become collateral for the loan.
Some business owners use asset-based loans when they don’t qualify for traditional financing or need a loan sooner. ABL lenders focus on the collateral and the company’s potential instead of the debt-to-worth ratio. The interest rates on these loans vary considerably. Your interest rate may fall between 7% and 30%. A lender will look at your business, credit, and other details before setting the terms. Some business owners secure lower interest rates with asset-based loans than business credit cards.
How Do Asset-Based Loans Work?
Asset-based loans use business assets as collateral. Accumulating more assets and using more resources as collateral will increase your borrowing potential. Asset-based loans get approved sooner than SBA loans and provide greater cash flow flexibility.
Most business owners use asset-based loans to cover short-term expenses. This type of financing is also frequently used among business owners with seasonal companies. Getting additional capital during slow months will improve their cash flow and allow them to continue expanding. In addition, these businesses can repay their asset-based loans once foot traffic picks up again in their area.
Lenders provide capital equal to a percentage of an asset’s face value. Liquid assets, such as accounts receivables and marketable securities, are more favorable than illiquid assets, such as equipment. As a result, lenders will give you a lower percentage of your equipment’s face value as capital than they would for a liquid asset.
What Business Assets Can You Use for This Type of Loan?
Business owners can use several assets as collateral for a loan. Liquid assets will command a higher percentage of their book value than illiquid assets. Keep that detail in mind when deciding which assets you use as collateral. Accumulating new assets will increase your loan’s maximum if you use them as collateral.
Accounts Receivable
Accounts receivable is a liquid asset that can command a higher face value for your asset-based loan. Lenders will check your credit score and the customer’s credit score to determine the likelihood of receiving the invoice payments on time. Accounts receivables featuring customers with bad credit will increase the lender’s risk and reduce the percentage of the face value you receive through the loan.
You are still responsible for sending invoices to your clients and receiving payments. Some businesses prefer this arrangement because they have complete control over the dialogue. You can walk away from an invoice by selling it to an invoice factoring company. Under this scenario, the factoring company will collect payments, and this can possibly cause unnecessary friction with customers. Asset-based loans ensure that invoice payment collections remain your responsibility.
Real Estate
Real estate is a tangible asset that lenders will consider for your asset-based loan. For example, some companies use their warehouses, stores, and other properties as collateral for the loan. They can use the extra capital to fix issues on the property or keep up with payroll.
Real estate investors can also capitalize on asset-based loans. These loans give real estate investors the necessary capital and time to enhance properties and find new buyers. Fix and flip real estate investors use these funds to stay afloat and make repairs. These investors then pay the loan in full after selling the property.
Equipment and Machinery
You won’t get as much of your equipment’s face value from an asset-based loan. These illiquid assets carry more risk for lenders and will take longer to sell to a buyer. Equipment financing can turn your core assets into sources of cash flow. Adding more equipment to your business operations will increase how much you can get from an asset-based loan.
Inventory
Asset-based lenders will consider your inventory when deciding on your loan amount. The face value percentage you receive will depend on the resources, but the percentage will likely be less than accounts receivables. Inventory financing is a useful way to obtain funds while you wait for your goods to sell. You can buy additional inventory with the capital, so you are prepared for the busy season.
Marketable Securities
Stocks and bonds are liquid assets that you can use as collateral for an asset-based loan. You will get a higher percentage of these assets’ face values from the loan. Money markets and mutual funds also count as marketable securities.
Common Requirements of Asset-Based Loans
ABL lenders are more generous than traditional business loan providers. Most lenders will not look at your debt-to-income ratio and focus on the value of your assets. Lenders will look at your assets to determine how much they will let you borrow, but they don’t provide asset-based loans to everyone. You will need a 620 credit score or higher for most lenders, but some don’t require a credit score. Many ABL lenders also require a 20% down payment or more to obtain capital.
Typical Process of Getting an Asset-Based Loan
A borrower must approach the lender with the right paperwork. The paperwork must verify the assets belong to your company. The lender will then review your application and make a loan offer. You won’t receive a loan amount equal to the face value of your assets. Lenders give themselves a buffer in case the loan doesn’t work out, and collateral becomes the only means of breaking even or making a profit. You can get approved for financing in a few days and then deploy the money into your business.
