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