How to Use Asset-Based Lending to Grow Your Business?
Every business wants to survive and thrive one way or another. To ensure that they are meeting their ends by the end of the day, they need to have a source of funds that will allow them to continue their operations. Having said that, businesses can take asset-based lending as a solution to cover short-term cash flow demands.
An asset-based business loan is a type of lending that you, business owners, can take advantage of. This form of financing involves getting a loan while pledging collateral inventory, accounts receivable, marketable securities, equipment, intangible properties, or anything valuable to vouch for repayment of the loan.
As a business owner, you should consider this option to meet the demands precisely when an event has occurred that disrupts your income flow, making it hard for your business to meet ends. In this way, you can continue your business operations even when you experience inconvenience in terms of your regular source of cash flow. In getting a loan from asset-based lending, you can use anything that has value but, preferably, liquid to secure funding from lenders. So rather than letting your business suffer due to not meeting your required financing, you can make use of this lending method to withstand hurdles and continue your business operations. In most cases, the rates charged for asset-based debts range from 5.25% to 15% and vary depending on several factors that may affect the business’s creditworthiness.
Getting a loan is not bad as it seems nor equates to being incapacitated to be self-sufficient. In fact, in some cases, other businesses utilize asset-based lending to improve the business income stream while pumping liquidity in the company, which could also be the same for your business. It is also noteworthy to mention that asset-based loans are categorized into asset-based lines of credit and asset-based term loans.
Asset-Based Line of Credit Vs. Asset-Based Term Loan
You should consider an asset-based term loan or line of credit if your company has assets and requires working capital to operate and grow. An asset-based term loan or line of credit is a way of securing a loan with the borrower’s inventory, accounts receivable, equipment, or other property, otherwise known as the ‘collateral.’ Therefore, if your company is new, and you have less-than-perfect credit, declaring a collateral’s value backs up the loan’s value and security rather than your financial track record. However, while these financing options can provide your business with the capital it requires, they operate differently and serve different business needs.
Asset-based lines of credit are revolving credit lines that provide financing by utilizing the underlying collateral. This type of financing strategy allows access to a fund you can draw for any business-related purpose. You must only repay the funds you used plus interest. It is best to use lines of credit for ongoing operating expenses or even an emergency fund. On the contrary, asset-backed term loans use the same securities as an asset-based line of credit. However, instead of being a revolving credit line, the facility is structured as a term loan that can amortize a fixed monthly principal and interest payments on a period of 1 to 5 years. This type of financing is best for one-time or big-time purchases such as buying equipment or expansion of business.
Benefits of Using Asset-based Lending in Your Business
The benefit of asset-based lending in your business is that it is more accessible to obtain than your cash flow counterparts, and it has lower costs and fewer covenants. Using assets as collateral ensures that you will be able to repay the loan even if you default. With assets on the balance sheet, it can put these investments to good use and secure additional funding for growth. Asset-based lending is typically approved and funded faster than traditional bank loans. If you can’t repay the loans, the asset you pledged as collateral to secure the loan can be seized and may sell it to recover the money. Consider the risks and benefits to your business if asset-based lending is good for you. Businesses use it in the midway stages of growth, allowing you to expand your business further.
The most crucial benefit of asset-based lending for your business is improved liquidity. This can provide you with financial stability and consistent cash flow and help stabilization of your business operations.
To Obtain Other Loans
An asset-based financing program is more accessible to qualify than a bank loan. You have a short track record of profitability and reasonable financial controls. The underwriting processes are much more efficient than preparing for a line of credit.
Gives You Great Flexibility
Most asset-based financing facilities offer great flexibility. This benefit is essential for your business that is growing quickly and needs additional funding.
Additional Read: The Fives of Major Asset Classes and How to Invest in Them?
Asset-based lending can serve as a gateway between invoicing a product or service and receiving payment for any of it. With so many distinct advantages, asset-based lending may be just what you need to achieve the growth you desire. Asset-based lending can give you greater flexibility allowing you to obtain capital when you most need it, faster approval, and provides faster funding delivery than conventional loans. These are some of the clearest benefits that you can take into account if you are looking for a more viable lending option to keep your business moving.
However, they sometimes come with higher interest rates and additional fees that put your assets at stake. Asset-based lending can make you too reliant that can affect your business decisions as it can give your business quick funding regardless of your credit history isn’t great.
Having that said, this can greatly impact the survivability and success of your business. So you must learn and understand how asset-backed lending can help your company reach its full potential. It can be difficult to obtain a business loan so you must examine if it will be suitable for your business since there are plenty of lenders to choose from.
Submitted to OroPocket, by author Ramandeep Kaur.