Asset-based capital funding often opens the door for businesses to add or upgrade equipment or cover short-term, time-sensitive projects. In today’s business world, companies may need to secure the loan with collateral like “inventory, accounts receivable, equipment, or other property owned by the borrower.”
Lenders use this collateral, or assets, to make sure the business will pay the loan back. It’s a sound financial resource for business financing, equipment dealers, and other companies to explore funding opportunities.
What is an Asset-Based Loan?
Just like they sound, asset-based loans are based on the company providing liquid or non-liquid assets as collateral to receive capital funding. If a business is newer, needs cash flow support, or is ready to grow and has assets on hand, this type of loan is beneficial.
For other funding and loan types, money lenders usually review the business cash flow. But, if cash flow is low or inconsistent and the business still needs financial resources, collateral or asset-based loans are a viable option.
Unlike a revolving line of credit, asset-based loans are set up similar to term loans. Asset-based loans are financed with a one to five-year amortization period that includes the monthly principal and interest payments. Because the loan is secured, the interest rates are usually lower than a standard loan.
Typically, lenders prefer highly liquid assets that are easy to convert to cash. For this reason, the primary asset considered is the accounts receivable based on factoring. Factoring uses the value of the business’ open invoices. Lenders use the value of these open invoices to decide if the company is eligible for an asset-based loan.
Asset-Based Loans vs. Other Funding Options
One of the most common types of funding options is a business line of credit. A line of credit has the advantage of a revolving credit limit. If a business is issued a $10,000 line of credit, the company can use the money, pay it back, and then the money is available again (as long as it keeps it in good standing.) The line of credit only incurs interest when it has a balance owed, and the business may hold the line of credit open, with the payments made on time, without having to reapply.
With an asset-based loan (or other loans), the funds are used once and paid back. Another critical difference between a line of credit and a loan is that there is a fixed repayment term. The repayment terms, including the term length and interest rates, vary by loan type, lender, the business’ credit history, whether it is a secure loan like an asset-based loan, and the business’s financial stability.
Why Businesses Need an Asset-Based Loan
Customized financing, like with an asset-based loan, provides the necessary financial resources a new or growing company needs. Often, asset-based loans are for small and mid-sized companies, but even larger corporations occasionally need funding for a significant acquisition. Asset-based loans allow companies to upgrade or add new equipment, cover payroll during fluctuating cash flow periods, handle unexpected business situations like location changes, and more.
How an Asset-Based Loan Helps Businesses
Besides providing the needed funding, asset-based loans help businesses in a variety of ways. The financing gives the business financial stability, and since tangible assets secure the loan, the loan process is often much faster than other, more traditional loans from lending providers. When a business has the assets to back up the funding request, even when they struggle with cash flow or do not have the credit history for a conventional loan, asset-based loans are usually easier to secure.
Is an Asset-Based Loan Right For My Business?
Like any capital funding, it’s essential to consider the benefits and risks of asset-based loans. Before applying for an asset-based loan, review the following:
- The business’s financial state: make sure it is realistic to use the business assets, especially the accounts receivable (open invoices), as collateral.
- Review the “cost of the loan relative to your assets.”
- Decide how large the loan needs to be for the business.
- Determine if the amount needed is possible to receive from the preferred lender.
- Consider the payment plan, the length of time involved, and if the business can afford to pay the loan off later.
Ready to Apply for an Asset-Based Loan?
Choosing any capital funding requires research, sound financial advice from industry experts and can help the business long-term. Before adding an asset-based loan into the business and financial planning, companies need to know their current financial situation, the number and current value of assets available, what they intend to use the loan for, and related financial data in their business.
Struggling with cash flow or wanting to expand the business should be simple and easy to do. Contact Intrepid Finance at 317-207-2235 to find out more or apply for investment funding today.