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Asset-Based Lending: A Viable Source of Funding for Small Businesses


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Asset-based lending is generally the best option for getting cash funding for your business if you have assets that are worth enough to use for collateral in a loan.

In many cases, asset-based loans will be structured as lines of credit, which means they can work like a credit card, but they will always be secured by any assets you pledge. This is usually better than a fixed term loan because you can choose to borrow less than the credit line available and then only make payments on the borrowed amount — without risking losing your assets. In comparison, a term loan issues an amount that must be repaid completely.

The main things to know are the qualifications these loans come with, and how you can get funding through them.

Main qualifications in asset-based loans
One of the great things about these loans is most lenders will work with you even if you don’t have very good credit. Because you’re making a guarantee for the loan by offering collateral that can usually be liquidated easily by the lender if they have to repossess it, they will usually be willing to overlook lower credit ratings.

Still, you should be able to at least show that your business is running relatively stable, and you will still need to have documents of your company finances well prepared to be analyzed. Many banks or business financing firms also want to be sure you’re in good standing with tax and accounting payments so that your assets aren’t at risk of having liens put on them.

What types of assets can be used?
Various types of collateral that can be used for asset-based lending including accounts receivable, items stored away in inventory, operating equipment, real estate, and sometimes personal assets.

Often when people hear about using accounts receivables to secure a loan, they confuse that with invoice factoring, which isn’t the same thing. Invoice factoring is simply the sale of accounts receivable to a factoring company who will give you a cash infusion in exchange for those invoices. In the case of asset-based loans, the accounts receivable are still technically yours, but the lender usually has access to customer payments.

In invoice factoring, each individual invoice is sold for a value based on a factoring line, or a discount of what the invoice total is. Most asset-based loans issue a loan amount based on your accounts receivables total, calculated based on a loan-to-value ratio. Typically, the more money your customers owe you in invoices, the higher your loan amount or line of credit will be.

Physical assets such as inventory in your warehouse or expensive equipment can also be used to improve your business’ cash flow. Bear in mind that those assets need to be listed on the balance sheets in your accounting books, and must to be specifically owned by your business. Equipment that’s personal property generally cannot be used for business asset-based loans.

It is also possible to use real estates such as the building and general property your business operates on as collateral. However, you will need your commercial mortgage mostly paid off in order to get a significant amount of funding from this.

Final thoughts
Securing this type of loan can be lengthy because the lender will need time to appraise your assets completely and accurately. This means that all your financial documents should be in order — meet with your accountant to make sure your balance sheets are correctly updated and your inventory is accounted for. If you can create an accurate future sales projection document that shows imminent growth for your business, that can work greatly in your favor.

Usually the amount you can borrow will be about 70-80℅ of your current unpaid invoices and about 50℅ of the value of your equipment and inventory. While going through all of the appraisal and lending processes can take time, once they’re completed you often have a lot of freedom in how you use your funds in asset-based lending.