Businesses may need to take out loans or access lines of credit to meet cash flow demands. For instance, a business might get a line of credit to cover its payroll if it delays the payments it expects to receive.
Suppose a company seeking a loan cannot present sufficient cash flow or cash assets to cover the loan. In that case, the lender may approve the release of funds upon presenting physical assets as collateral. For example, a restaurant might get approved for a loan by using its equipment as a guarantee.
In asset-based lending, terms and conditions will be contingent on the type and worth of the assets provided as security. In most cases, lenders prefer highly liquid collateral such as securities that can be quickly converted into cash if a borrower defaults on payments.
Loans using tangible assets are considered riskier. As a result, the maximum loan will be significantly less than the asset’s actual value. Interest rates can vary widely contingent on the applicant’s credit history, cash flow, and the length of time they have been doing business.
Better liquidity
The crucial benefit your business gets from applying for asset-based lending is improved liquidity. When used correctly, it can provide financial stability as well as reliable cash flow.
This advantage can stabilise operations for businesses in a growth spurt, have tight cash flows or have seasonal profits.
- Easier to get approved
Getting approved for an asset-based financing program is far easier than qualifying for a business loan or line of credit. At the very least, your business must have a short track record of profitability as well as reasonable financial controls. Aside from this, the most critical requirement to present are assets that can be leveraged.
The best asset to leverage is your accounts receivable. Invoices coming from creditworthy commercial clients are good collateral since they can easily be turned into cash. In addition, your company can utilise inventory and equipment as collateral.
- More versatile than other types of financing
A majority of asset-based financing facilities provide terrific flexibility. Typically, there will only be a few restrictions on how you can spend the funds. But in most cases, it must be for business purposes.
The financing line will depend on the value of your accounts receivable as well as other collateral. Therefore, as your sales grow, your line can increase. Increases are quickly approved. Your company will not have to go through the process of underwriting. This advantage is crucial for companies that are scaling and need extra capital.
- Get funds quickly
Businesses that meet conditions can get asset-based loans in no time. The process of application and underwriting is faster than that of a traditional loan or line of credit.
The underwriting process can be completed in as little as two weeks, assuming that your business produces revenue and has sound financial controls. But complex situations such as turnarounds may require a longer time to underwrite.
- Fewer covenants
Compared to conventional lines of credit, asset-based loans will have fewer covenants. Therefore, managing the line and satisfying the agreements is simpler.
Asset-based lending can be a stepping stone to obtain other products.
Companies that apply for asset-based lending are typically in an intermediate growth phase. Thus, although they have outgrown financing lines, they cannot yet qualify for conventional lines of credit.
An asset-based line allows businesses to build and improve their track record with a lender. It helps business owners scale their business further. Once a company’s track record is established and strong enough, it can switch to other solutions.
- Asset-based lending is a low-cost option.
Most asset-based loans have a lower cost compared to other alternatives such as factoring. With this apparent advantage, savings go directly to the bottom line.