What is an Asset-Based Business Loan?
Your business may be looking to expand or it needs funding to get through a seasonal slump. No matter the reason, asset-based lending is one way to secure cash for your business without the hoops of a traditional loan.
What Is Asset-Based Lending?
Getting an unsecured business loan from a bank can be nearly impossible. Not only does the application process take weeks or even months, but your business also has to have a long history and its credit and your personal credit need to be near perfect. There are few businesses that qualify. If that unicorn is out of your reach, asset-based lending is a loan that usually relies on your accounts receivable as collateral. While you can use all your assets, including equipment and inventory as collateral, sticking to your accounts receivable means that you never take out a loan that is greater than the money you know you have coming in.
How Does It Work?
Because the collateral secures your loan, you can have less than perfect credit and the application process is therefore simplified. Often you can apply and have funding within a week or two. The compensation for this simplified process is a higher interest rate than traditional lending. Expect to pay between 7% and 17% APR. It’s worth it to shop around because of the differences in interest rates. If you are a higher risk, you can expect to pay at the higher end of the spectrum.
Depending on what assets you use to secure the loan you’ll receive approximately 80% of the value of your collateral. The exception is using inventory. If you use inventory to secure your loan you’ll only receive about 50% of the value because its sale is not guaranteed and the lender doesn’t want to have to sell your inventory if you default on the loan.
What Are the Benefits?
Asset-based lending gives you cash quickly to meet business needs. Build your credit by making your payments on time. Expand your business to meet growing demand. Using your accounts receivable means you know you’ll be able to repay the loan and move on with your business quickly. Also, unlike some loans, there are no restrictions on how you use the funding.
Before you apply for any type of funding, it’s important to talk to your accountant to talk about the long-term repercussions of repayment. Make sure that asset-based lending is a short-term solution to a short-term issue rather than a band-aid on a severed limb.