Understanding The Basics of Asset Based Lending
When you need money for your business, there are many different options. Each option has its advantages and disadvantages. It’s up to you to carefully consider all the aspects to decide what type of lending is right for you and your business situation. One option you may have is asset based lending.
What Is It?
Asset based lending is basically financing you secure for your business with your business’s assets. Usually this type of credit is less like a loan and more like a line of credit, so you are able to borrow as you need it and as you can afford it.
How Is It Used?
This type of loan is best used by businesses going through a growth period or having cash flow issues. A business that is seasonal, for example, could greatly benefit because the line of credit is there when and if they need it during those slow periods.
How to Qualify
The top requirement to qualify for this loan is having assets that can secure the financing, like accounts receivable, inventory or equipment. Typically, lenders give a line of credit to small or medium sized businesses, and assets must be free and clear. The business’s accounting records should be in order without any outstanding issues.
How Much Can Be Borrowed?
Generally, the amount that can be borrowed depends on the value of the assets. The lender usually extends a line of credit that is based off a percentage, which is usually between 50 percent and 85 percent of the value of the assets. Accounts receivable assets usually have a larger percentage of borrowing power where equipment and inventory has a smaller percentage.
What Is the Cost?
Lenders typically complete onsite inspections and reviews of a company’s books, which they often charge to do. In addition to this fee, you will also have to pay interest on any money borrowed, and there may be additional fees for other services.
Is this different from factoring?
While factoring also involves getting money based on accounts receivable, it is completely different. Factoring involves actually selling the invoices for a percentage of their value. With asset based lending, you aren’t selling anything. The assets are just used as collateral.
When you need some extra cash flow in your business, you need to consider all your options. Sometimes a standard loan will work fine, but many times you need to look into alternative financing options, like asset based lending, which allows you to borrow money based on the value of your business’s assets.