An asset based loan is simply a loan that is based on assets such as inventory and accounts receivable, and these assets are used as collateral. Basically, with this type of loan, you will be putting future revenue up as collateral in order to obtain access to capital now. In asset based lending, a lender will provide you with funding that will be based upon a percentage that is agreed upon of the value of the secured assets. This percentage will typically be 70 to 80 percent of the receivables that are eligible, and generally 50 percent of the finished inventory.
How do you secure an asset based loan? Luckily, there is a wide variety of financial companies that provide asset based lending. A good amount of banks are involved as well as independent finance companies. If you own a small business, it is essential that you locate a lender that is willing to provide lines of credit to fairly new companies. It may be a bit difficult to find one, but that should not stop you. You must ask around and talk to people who could help. Usually, asset-based lenders favor making larger loans, mainly because the costs involved with monitoring asset based loans are typically the same no matter the size. As long as your financial statements are good, your customers pay on time and your inventory is commonly sold, you should have an easy time securing this type of loan. Make sure you make lenders comfortable and show them accurate financial statements.
Asset based lending is especially beneficial for those in need of capital, such as companies that are growing fast, undercapitalized or highly leveraged. These loans are also good for those who need to get passed a financial obstacle. Asset based loans are additionally good for distributers, manufacturers and services companies that have seasonal needs or cycles that hinder cash flow.
Asset based lending does have its downsides, too. For example, the chances of obtaining financing are as good as the receivable quality. Usually, commercial lenders will look through your customers to see if you have ones that pay quickly and have good credit ratings. Sometimes, sales to small businesses or individuals may not be considered eligible. Asset based loans usually cost more than regular loans as well, and interest rates can vary. Sometimes, your personal guarantee may be required. Consider the situation of your business as well as the pros and cons to determine if this type of lending is for you.