Asset-based lending uses your business assets as collateral. A lender will assess the value of your secured assets and offer an advance up to a certain percentage. For example, fixed assets such as property or equipment can get you 50% of their value, and liquid assets such as invoices or inventory can get you 85%. This type of financing can be great for small businesses, but what are the pros and cons, exactly?
Pro: Fast Cash
Applications for asset-based loans are quick, painless, and require little documentation. You just need to prove you meet the basic criteria, and within just a few days, you can have your funds.
Con: Risked Assets
Make sure you can afford the terms your specific lender is offering. Otherwise, if you default on the loan, the lender can seize your collateral. If this is a particularly important asset to you or your business, do everything you can to not lose it.
Pro: Low Rates
Compared to other types of loans, asset-based lending provides competitive rates due to the use of collateral. Collateral is how lenders feel more reassured that you’ll pay off your loan in a timely manner. Additionally, if you have good credit, your interest rate could be even lower. Try improving both your business and personal credit scores before submitting an application to get the best rates possible.
Con: Limited Values
The total value of your loan is based on the value of your assets, which means that there’s a cap to how much money you can work with. This works well for short-term financial solutions, such as business owners who need a bit of extra working capital, but if you need a larger sum and don’t have an extremely valuable asset to bargain with, you’ll have to look elsewhere.
Pro: High Flexibility
With asset-based financing, there are generally two options. You can either apply for a business loan, where you repay the advanced amount incrementally and with interest, or you could take out a line of credit. A line of credit offers the most flexibility because you can withdraw funds at any point and you only have to pay interest on the credit that you’ve utilized. If you just need a little reserve, a line of credit through asset-based lending might be the perfect option for you.
Take the time to check out different lenders and inquire about all the associated fees, charges, and interest before settling on a financing option.