Asset based lending is one option you have when you need to get financing. It can allow you to get the cash you need right now. Of course, as with any lending situation, there are important aspects to this type of lending that you should be aware of before you get into an agreement.
What Is It?
Asset based lending is where you borrow against the value of your assets. The company will appraise the assets that you want to use for the loan and then lend you money based on a percentage of that value. Typically, the assets that are used are inventory and accounts receivables. This means that you are borrowing on future sales. This type of lending is usually offered through the typical lending sources. This includes banks.
How to Get It?
Most often lenders want to invest in higher value loans. This is because it is easier for them to earn a profit. Banks have to offer the same monitoring and management services for all sizes of loans. With smaller loans, much of the profit can be eaten up by administrative costs. So, smaller sized businesses may find it tricky to get this type of loan. However, a company that can show it is a good investment may be able to convince a lender to take a chance on it. Generally, any company that can prove it has a good financial history and the ability to manage its finances well should be able to secure this type of loan with little hassle.
Pros and Cons
The major advantage of asset based lending is that it a good choice for a company that is growing fast. It allows you to tap into money that is currently tied up so you can reinvest it into your business and keep the growth going. The money you get through a loan can be used to buy new assets or to buy more inventory to fill orders.
The biggest issue with this type of loan is that it is highly dependable upon the assets that you have to offer. If you don’t have much inventory or your accounts receivables are not in good shape, then you won’t likely be able to borrow much, if anything.
Asset based lending is worth considering when you need fast money to keep your business running. It allows you to put your inventory and invoices to use to get working capital. However, you need to have a pretty strong financial situation while also having adequate assets to support your loan.