Asset based lending is a loan that is secured by tangible assets such as inventory, accounts receivable, machinery, collateral and more. The value of the loan is derived from the collateral you provide, not your financial history so if your business is a startup or have poor credit this type of loan is useful for you. If you default on a loan, the lender can seize the assets to recoup any losses.
Companies that can use asset-based loans include those who need working capital to operate and grow. If you have solid financial statements and history, you can qualify for an asset-based loan.
The Pros and Cons of Asset-Based Financing
One of the pros about asset-based lending is that companies can still have ownership over their assets over the life of the loan. This loan comes with a short approval period which means you can get the funds quickly which is key if you are in need of funds as soon as possible.
The downside is that it can be expensive to pay back the loan. The APR is between 7%-17% plus loan fees. There is risk of losing your assets in case you default on payments and not all assets qualify as collateral.
Common Types of Collateral Used in Asset Based Lending
- Accounts receivable: if you have a service-based business that uses invoices for customers, receivables that are due within 90 days can be eligible as collateral in asset-based lending. The more invoicing you are doing, the greater the value of your invoices which means you would be able to borrow more.
- Inventory: if you are in an industry that has a good amount of inventory on hand then it can be used as collateral.
- Purchase Orders: purchase orders are commonly used in asset-based financing. A purchase order outlines the order when a customer places an order which shows the price, quantity, etc., and then the lender will review the terms to understand the customer and the value of the purchase order.
- Machinery or Equipment: if you are using your equipment as collateral, you need to detail each item’s purchase price, its condition, its age, and its location. You need to own your equipment for it to be eligible as collateral in an asset-backed loan.
- Real Estate: any real estate that a business holds can be considered as a fixed asset eligible for asset-based lending. Although it is possible to use real estate, the process is tricky. The first thing you need to get is an appraisal to determine the property’s market value.
- Intellectual Property: intellectual property is an intangible asset, but it can be used in calculation.
- Tangible Assets: depending on the type of business you have, there might be other assets that will qualify as collateral.
Documents Required by Asset Backed Lenders
Some of the information that asset backed lenders will ask to see are:
- Balance sheet: your balance sheet looks into your assets making it the most important indicator of your business being eligible for funding.
- Sales forecast: asset-based lenders care more about the future than the past.
- Bank statements: you will need to provide at least 4 months’ worth of your bank statements.
Is Asset-Based Financing Right for You?
Just as with any big financial decision, you need to do your research and see if asset-based financing is right for your business. Depending on your situation, asset-based lending or traditional lending will be the best for your business. If you are having trouble getting approved with the traditional loan option, asset-based financing can provide you with the cash you need to grow your business.