Six Advantages of Asset Based Lending

Asset based loans have been gaining popularity in recent years. They offer a number of the advantages that you can expect from similar products, such as a line of credit. However, qualifying for an asset-based loan is a lot easier.

In this article we will discuss the six most important benefits of asset-based loans.

Improved liquidity

Improved liquidity is the most important benefit that your company gets from using asset-based financing. When it is used correctly, it can provide you with financial stability and predicable cash flow. This benefit can help stabilize operations for companies that are growing rapidly, have tight cash flows, or have seasonal revenues.

Easier to get than loans and lines of credit

It is easier to qualify for an asset-based financing program than qualifying for a bank loan or business line of credit. The business needs to have a short track record of profitability and reasonable financial controls. Aside from that, you must have assets than can be leveraged.

The easiest asset to leverage is your accounts receivable. Invoices from creditworthy commercial clients make great collateral because they can easily be turned to cash. Most finance companies prefer to finance invoices that pay within 70 days. Additionally, your company can use inventory, equipment as additional collateral.

Other types of common assets used to secure asset-based loans include:

  • Accounts receivable
  • Product inventory
  • Machinery
  • Specialized equipment
  • Buildings
  • Real estate

Provides great flexibility

Most asset-based financing facilities offer great flexibility. Usually there are few restrictions on how you can spend the money, it just needs to be spent for a business purpose.

The line itself is tied to the value or the accounts receivable or the other collateral. The line can increase as your sales grow and can be approved quickly. Your company does not need to go through the complete underwriting process again. This benefit is important for companies that are growing quickly and need additional funding.

Quickly obtained

If your company meets the qualification criteria it can get an asset-based loan quickly. The application and underwriting process is much faster than qualifying for a conventional loan or line of credit.

The underwriting process can usually be completed in a couple of weeks – assuming that your business is profitable and has reasonable financial controls. More complex situations, such as turnarounds, may require additional time to underwrite.

Fewer covenants

Asset based loans have fewer covenants than conventional lines of credit. Managing the line and staying in compliance is substantially simpler.

Can be used as a stepping-stone to other products

Companies that use asset-based lending are usually in an intermediate growth phase. They have outgrown factoring financing lines, but they are not yet able to qualify for a traditional line of credit.

An asset-based line allows you to build and improve your track record with a lender, as you work to grow your business further. Once your track record is established and strong enough, you should be able to move to a less expensive solution.

Lower costs than alternatives

Most asset-based loans have lower costs than comparable solutions such as factoring.

The Bottom Line

Asset based financing is a helpful resource for business owners who have difficult qualifying for traditional loans. It is important to learn more. Understand how asset backed lending will help your business achieve its potential. As you can see there are several advantages of asset-based funding.