Asset-based lending: What is it?
Asset-based lending is when you receive a business loan secured by a form of collateral such as equipment, inventory, receivables, or real estate.
Asset-based lending can make it easier for small businesses to get loans because the collateral is less risky for lenders. In the event that you fail to repay your loan, your lender may sell off your assets in order to recoup its losses.
What is the amount you need?
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What is asset-based financing?
Asset-based lending is available from both traditional lenders and online lenders. Asset-based financing can take the form of term loans, lines of credit or both.
Your lender will offer you a mortgage based not only on your qualifications but also the value and type of collateral that is available. Lenders will use your loan-to value ratio to determine how much funding you are eligible for.
LTV can be calculated by multiplying the amount of your loan by the value you are pledging as collateral. Your lender might only offer you a loan up to half the value of an inventory if that’s what you use as collateral.
The more liquid the collateral you have, the higher the funding amount and the lower the business loan rate.
The lenders prefer that you use highly liquid collateral, such as securities or certificates of deposit. This is because they can easily convert it into cash in the event you default. The physical assets are viewed as a greater risk.
Example of Asset-Based Lending
You are looking to borrow $100,000 for your company’s growth. If you apply for a loan from an asset-based lending institution, and intend to use marketable securities as collateral (e.g. stocks, bonds or preferred shares ).), then this is the best way to go.
The lender will agree to provide a loan that is equal to 85% the value of marketable securities. The lender may only offer a loan of up to $102,000 if your marketable securities are worth $120,000.
The lender might only give you 50% of your inventory’s value if you want to use it as collateral. Even if the inventory is worth an additional $120,000 in this case, you can only borrow up to $60,000. This is $40,000 below what you are looking for.
Cash flow vs. asset-based lending
While asset-based loans allow you to borrow funds based upon the collateral value, cash flow financing — sometimes referred to by traditional business lenders — lets you borrow money on future cash flows of your business.
This is a quick overview of these different lending types.
The pros and cons of Asset-Based Lending
Qualifying for a loan can be simpler. Asset-based loans are a type of lending where the lender evaluates your application primarily based on your collateral. You may be able access funding if you are able to provide strong collateral, even with a poor credit rating or unstable cash flow.
You’ll receive a lower rate of interest on an asset-based business loan than you would with unsecured options. This is because your collateral reduces the risk to the lender.
Asset-based financing is flexible and can be used to cover operating costs, manage cash flow, or invest in new business opportunities. Asset-based lending doesn’t restrict the use of your funds. This makes these loans an excellent option for many small businesses.
Some assets are not eligible as collateral. Your lender will ultimately decide whether or not certain assets are eligible as collateral. Lenders may reject specialized items, inventory that is perishable or equipment with high depreciation rates.
Fees. Additional fees may increase loan costs, even though these products have lower rates of interest than some other options. Fees may be charged for evaluating your collateral and monitoring it, including origination, audit and due diligence charges.
Your assets are at risk. In the event of default, your lender may sell assets in order to pay off your debt.
Find out more about asset-based loans:
What are some examples of asset-based loans?
Asset-based loans include financing for accounts receivables, commercial real estate, and equipment.
What are the requirements for an asset-based lending?
You’ll have to provide high-value collateral to qualify for a loan based on assets. This is an asset that has a slow depreciation and can be converted quickly into cash. A good financial and credit history is also important. The qualifications you need will depend on your lender and the loan product.
What’s the difference between a loan based on assets and one backed by hard money?
Hard money loans almost always have real estate as collateral. Asset-based lending, however, uses more liquid collateral such as receivables. Asset-based loans include hard money lending.