When weighing your options for a loan, you may have come across asset-based loans. Just what is an asset-based loan? Essentially, this lending model requires you to use your assets as collateral, much like a secured business loan. This article explains the basics of an asset-based loan and how it works, allowing you to figure out if this is a viable option for you.
What is Asset Based Lending?
Many banks and alternative lenders offer asset-based lending. An asset-based lender advances funds based on a predetermined percentage of a secured asset’s value. What is the ratio on an asset-based loan? Usually, this will be 70 to 80% of eligible receivables or 50% of any finished inventory.
There are many reasons why a business pursues asset-based loans. This can be an excellent capital source if your company is growing rapidly, highly leveraged, going through a turnaround, or generally undercapitalized. If you need a quick cash infusion to get over a small hurdle in operations, this type of loan can help.
Distributors, manufacturers, and service companies with leveraged balance sheets often use these types of loans. Those impacted by seasonal demand or cyclical industry trends that impede regular cash flow may also seek out this type of loan.
Beware that asset-based loans do tend to cost more than traditional loans. The interest rates vary widely, and lenders may conduct added due diligence and audits — and ask you to pay the fees. Larger banks may also request a personal guarantee.
Leveraging Your Assets
There is more than one type of asset-based loan and how it works varies depending on the precise contract. The majority of lenders prefer to take accounts receivable assets as the primary form of collateral in asset-based lending. If this isn’t an option for you, you can still use other assets, including inventory, real estate, machinery, or other business equipment.
Options for Small Businesses
Asset-based lending is just one type of business loan a small business can pursue. Small businesses will generally put their accounts receivable and inventory on the line to secure such a loan and get immediate access to liquid funds.
If you have a small business, it’s wise to weigh your options when it comes to different program types. Determine whether an asset-based loan is the right fit for your business. The Business Financing Advisors at ROK Financial can help you determine if an asset-based loan is best for your business. Complete a 1-minute application to discuss your options further.
What is an asset-based loan? That part is clear. However, you’re probably now wondering how to get an asset-based loan. Ideally, you will meet the following criteria:
● Present a positive financial history (in the form of good financial statements and reporting)
● Possess commonly sold inventory, or large value assets.
● Have customers who have a proven track record of paying their bills
You should also have a comprehensive financial reporting system in place because you will need to present a potential lender with accurate and detailed financial history information.
The Final Word: What Is Asset Based Lending?
This article answers the question, “What is an asset-based loan?” There are many reasons why a business pursues asset-based loans. Whether an asset-based loan is right for you depends on your precise business needs. Speak with an advisor today at ROK Financial to learn more and get options in minutes, and funding in as fast as just a few hours!