Whether your business is a startup or an established business, you will often encounter a need to infuse some cash into the business in order to establish it or to expand it. If it is hard to qualify for a traditional business loan, you may be able to obtain asset-based financing instead.
What is Assed-Based Lending?
An asset-based loan is secured by some type of asset that your business owns. The asset could be your accounts receivables, your equipment, your inventory or other types of collateral. Asset-based lending is easier to qualify for because if you don’t pay the loan back, the lender can take the assets on which the loan is based.
Types of Asset-Based Loans
Asset-based loans can be traditional business loans or lines of credit. With a business loan, you borrow a fixed amount of money, and you pay the loan and interest back over a specified period of time. With a line of credit. you get approved for a line of credit up to a certain amount, and then you only borrow the amount you need at one time, similar to a credit card.
The amount you are able to borrow varies by the type of collateral that you provide. If the loan is based on your accounts receivables, you can usually borrow from 75 to 85% of the value of the receivables. For other assets such as equipment or inventory, you can borrow around 50% of the value of the assets.
Interest rates for these loans can vary from 7% to 30%. Most lenders who provide asset-based loans are alternative lenders, not banks, so their rates are higher. Terms can vary widely, too. The terms for accounts-receivables-based loans are usually very short. Other assets can allow for longer terms.
Pros and Cons of Asset-Based Lending
Some advantages of asset-based loans are that they are easy to qualify for and that you are not putting your personal assets at risk, only the assets of the business. These loans can also be very flexible, especially if you structure them as lines of credit.
A disadvantage of asset-based loans is that they may have a higher interest rate than conventional bank loans. Another disadvantage is that the amount you can borrow is limited by the value of the assets you are using for collateral.
Despite any disadvantages, the flexibility and ease of qualifying for asset-based loans make them a great choice for your business. The cash you can borrow can make the difference between starting your business or expanding it and missing the opportunity to do so.