Pros and Cons of Asset-Based Lending

When you are exploring financing options, you will come across one called asset-based lending. Every loan is unique and most of them act as a business line of credit which is when a business can borrow from assets on an ongoing basis to pay for expenses as needed.

In this post, we’ll explain what an asset-based business loan is and their pros and cons.

What Is Asset-Based Lending?

There are two types of asset-based lending which are traditional business loans and business lines of credit. A lender will look at the market value of your secured assets and offer capital in advance no matter which type of lending you choose.

You can borrow between 75-85% of your accounts receivable value and about half the value of your equipment or inventory. If you choose a traditional business loan, you will repay the advance plus interest over a set time period. If you take out a line of credit you will be able to withdraw as much as little credit as you need, only paying interest on the funds you use.

Since your business assets will be used to secure the financing, your lender will be able to seize and sell them in the event you default.

What Types of Assets Can Be Used?

There are numerous assets you can use if you move forward with an asset-based loan. Here are some examples:

• Accounts receivable: if you invoice customers, you can use receivals that are due within 30 to 90 days as collateral.
• Inventory: Inventory may serve as collateral. This can be a good option if you’re in retail or wholesale and have a lot of inventory at your disposal.
• Equipment or Machinery: you can use high-value equipment or machinery that you have.
• Real Estate: Real estate that you have paid for also qualifies as collateral. if you decide to put up real estate you will need to get it appraised to figure out its value and appreciation.

Rates and Terms for Asset-Based Loans

When it comes to rates for asset-based loans, they vary. The lender as well as your qualifications will determine what the terms will be.

Rates range from 7% up to 30%. Since you’ll need to pledge an asset as collateral to take out an asset-based loan, you may lock in a lower rate than you’d be able to with an unsecured business loan.

Just like rates, asset-based loan terms are inconsistent. The type of asset you use and its value will play a significant role in the terms you receive. If you use accounts receivable, you can expect short terms based on the terms of your invoices.

Pros of Asset-Based Lending

• Quick application and funding: unlike other financing products you can apply for an asset-based loan quickly with minimal documentation. As long as you meet the lending criteria you might get approved and receive your funds right away.
• Financial Stability: an asset-based loan can be helpful during tough times. You can use it to increase your cash flow and restore your business back to stability.
• Competitive Interest Rate: compared to other term loans, an asset-based loan may come with a lower interest rate. This is true if you have good credit.

Cons of Asset-Based Lending

• Asset Risk: if you fail to repay your loan, your business assets will be at risk. Your assets can be taken away and be sold.
• Fees: there’s a chance you have to pay other fees with an asset-based loan.
• Borrowing Limits: since the amount you can borrow will be based on the value of your company asset, you may not receive as much funding as you need or want.

The Bottom Line

If you have a young and growing business, an asset-based business loan may be invaluable, especially if you’re unable to secure other types of financing. Before you choose a lender and move forward with a loan, however, do your research and compare all of the options available to you.