What Is Asset-Based Lending, And Is It Right For Your Business?
Asset-based lending enables small and medium businesses and emerging entrepreneurs to receive sizeable loans from lenders. Compared to various small business loans, they are far easier to qualify for if the company has possession of valuable collateral.
What Assets Are Used As Collateral To Secure A Loan?
Businesses hold multiple assets which are used as collateral when securing a loan. These include inventory, equipment, and accounts receivable. Below is a list of collateral used when securing an asset-based loan.
Invoice lending helps in leveraging the existing accounts receivable value. A factor pays the clients a given percentage of outstanding invoices value and assumes the collecting of payments after that. Clients receive a lump sum percentage of the total value, and the lender makes a profit from the fees and the remaining share.
Clients who purchase dilapidated structures receive a bridge loan secured to the future redeveloped property. It is an excellent approach by private developers who intend to rehabilitate old buildings.
Inventory financing is used to purchase goods for a sale date. It is financed via this method serves as collateral, and regular payments are necessary to keep possession of goods.
Equipment financing uses equipment as collateral. Clients are advised to make regular payments to maintain possession of the equipment.
The Common Type Of Asset-Based Loan
If the client defaults on loan payments, a physical structure is used as collateral. A home mortgage is the most common type of asset-based lending and can be accessed by small to big businesses. Lenders usually set a grace period for clearing the loan. Which is coupled with a given interest rate and clients make monthly payments throughout the grace period.
Asset-Based Loans As Revolving Credit
Asset-based lending options are structured as revolving credit based on outstanding invoices. The lender determines the inventory and accounts receivable. That translates into the borrowing base directly proportional to the amount available for borrowing. Make sure to establish upfront advance rates for single collateral.
Benefits Of Asset-Based Lending
Easier To Obtain
Qualifying for an asset-based lending program is more effortless. The security of such funds is provided by the collateral or the line of credit.
There are fewer restrictions on the use of asset-based funds. Since the financing is secured to the assets value, regular funding increases as assets grow.
Lower Costs Than Similar Solutions
The majority of asset-based lending options have minimal costs compared to similar alternatives. Such loans are usually priced by an annual percentage rate (APR).
Consider the benefits and risks before deciding on the type of asset-based financing. Such an option is viable for the right business under the right circumstances. Consider seeking the services of Skogen Capital Lending and reach out to us for professional guidance.