Finding lending options through traditional loans can be a difficult process. Your company must be profitable — with a strong revenue history, not to mention a great personal credit score as well to even be considered. However, this isn’t your only choice. There’s a wide variety of asset-based lending options that you can take advantage of today.
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How Does an Asset Based Loan Work?
Asset-based loans are business loans that are secured by collateral. An asset-based loan or line of credit may be secured by accounts receivable, invoices, purchase orders, machinery and equipment, inventory, intellectual property, marketable securities, residential property or commercial real estate that the business owner owns.
Asset-based loans (also known as ABL) are a form of business lending that relies on the collateral of your business, rather than just revenue and credit. Conventional business loans look at revenue, financials, and other indicators first, collateral second, while asset-based loan programs look at collateral first and cash flow and financials second. A common misperception is that asset-based loans do not look at the credit, financials, and other matters of the business, which is NOT true. Asset based lending allows businesses that are growing fast to maintain the money needed to keep up with the growth. While ABL is great for high growth companies, any company that is in distress and needs to recapitalize its balance sheet can utilize asset-based lending.
Accounts Receivable (A/R)
Accounts receivable (A/R) are invoices sent by businesses to customers for goods or services that have been delivered or completed but have not been paid for by the customer. Account receivables are also considered any amounts of money owed by a customer to a business for products or services delivered even without and invoice. Proper accounting principles account for these outstanding invoices by listing on a balance sheet and a running tally account receivable aging report. These accounts receivable listings can be used as collateral and are a great option for businesses that have outstanding invoices but no capital. Accounts receivable financing options can help your business make the most out of unpaid invoices.
A purchase order (also known as a PO) is an official document issued by a customer/buyer committing to pay the business owner/seller for the sale of specific products or services to be delivered in the future. The advantage to the buyer is the ability to place an order without immediate payment. From the business owners perspective, a purchase order is a way to offer customers credit without risk, since the buyer is obligated to pay once the products or services have been delivered, unlike an invoice which is sent post-purchase or services completion which has terms of repayment typically of 30, 60, to 90 days. A blanket purchase order agreement is a commitment to buy products or services on an ongoing basis until a certain maximum is reached or completed.
Machinery and Equipment
For purposes of asset based lending, machinery and equipment are an industrial fixture defined as any mechanical, electrical or electronic device designed and used to perform some function and to produce a certain effect or result. This also includes all devices used or required to control, regulate or operate a piece of machinery, provided such devices are directly connected with or are an integral part of the machinery and are used primarily for control, regulation or operation of machinery.
Goods available on hand or available on site for sale and raw materials used to produce goods available for sale. Inventory represents one of the most important assets of a business because the turnover of inventory represents one of the primary sources of revenue generation and subsequent earnings for the business. These offer a great source of collateral for asset based lending.
Marketable securities are securities or debts that are to be sold or redeemed within a year. These are financial instruments that can be easily converted to cash such as common stock, government bonds, mutual funds, or certificates of deposit.
Intellectual Property (IP)
Intellectual property is any product traditionally categorized as patents, copyrights, trademarks, and trade secrets that the law protects from unauthorized use by others. The ownership of intellectual property inherently creates a limited monopoly in the protected property. Keep in mind that “the general rule of law is, that the noblest of human productions—knowledge, truths ascertained, conceptions, and ideas—become, after voluntary communication to others, as free as the air to common use.”
Commercial and/or Personal Real Estate
Real estate is the property, land, buildings, air rights above the land, and underground rights below the land.
What Are the Most Common Uses of Asset-Based Loans?
- Cash Flow
- Raising capital to expand business
- Inventory or supplies
- Emergency Cash infusions such as emergency relief for accounts receivable issues
What Are the Best Industries for Asset-Based Loans?
- Staffing Agencies
- Wholesale B2B (Businesses to Business) Industries
What Documents May Be Needed to Get Approved for an Asset-Based Loan?
- Business Bank Statements
- Profit and Loss Statement
- Balance Sheet
- Account Receivable and Accounts Payable Aging Report
- Business Tax Returns
- Debt Schedule
- Inventory Report
*The required documents will depend on the type of assets that will be used as collateral
What Are Asset-Based Lending Rates?
There are a variety of different asset-based lending companies, all of which have different structures, credit criteria, and rates. Rates for an asset-based loan can range from 5.25% to 15% and can be structured as an asset-backed line of credit or an asset-based term loan.
- Rates: Interest rates start at 0% up to 28.99%
- Terms: 1 to 10 years
- Fees: Origination Fees vary typically 0% to 3%
- Payments: Low flexible monthly payments
- Credit Standards: Must have good credit and credit history
- Documentation: Full Documentation is required
Why Asset Based Lending?
Most borrowers have difficulty navigating the traditional lending marketplace. When it’s all said and done, they need a lending option that works for them. An asset-based lender can be the best choice for your business, offering flexible and diverse options that you can fall back on when you need cash fast. Here are some of the most popular reasons why business owners choose asset based lending.
Poor Credit or Revenue History
Asset-based-lenders have one primary concern, and that’s the collateral you’ve provided. While most lenders will mull over your profitability, cash flow, and credit scores — and asset-based lender uses your collateral as security. So, those struggling with a less than stellar credit history or revenue can find an asset-based loan that works for them.
Growth is the most exciting part of owning or operating a business, but it’s also one of the most frightening. Young flourishing businesses need working capital to keep up — but they often don’t have the time in business or other qualifications to obtain a traditional financing solution. So, they turn to asset-based lending for a workaround that offers cash flow solutions to help with working capital and expansion. The good news is that if your issue is growth, you must be doing something right. An asset-based lender will build their relationship with you due to profitability projections and sales — along with what you’ve used as collateral.
Traditional business loans typically come with personal guarantees or collateral such as a family home. Asset based lenders use fairly specific assets from your business’s balance sheet, so the personal risk to you is less. Most asset based lending does not involve a personal guarantee for extra collateral, however this depends entirely on the lender. When you need funding for working capital or other business needs — asset-based loans are an ideal option for those looking to mitigate personal risk while maximizing their possibilities.
Asset based lending is a flexible solution for many businesses. An asset-based loan can work similarly to lines of credit, which makes them a great option for business owners struggling with working capital or other cash flow issues. Lines of credit allow business owners to only take out the cash they need, when they need it most. For business lines of credit, you only pay interest on what you take out, rather than term loans where you repay in full with interest regardless if you use the full amount. Bank loans or other traditional funding options have many restrictions set out for the use of funds. However, asset based lending is much more flexible. Asset based lending allows you to use the funding for a wide variety of uses including working capital, expansion, purchasing another business, or refinancing an existing line of credit.
Get the Most Out of Your Valuable Assets
Many businesses have assets on the balance sheet that can prove to be extremely valuable to a particular lender. Equipment, machinery, inventory, and real estate are all assets that can be leveraged as collateral for working capital. Asset based lending gives your company the power to grow using assets you’ve already invested in.
Asset based lending offers a sound solution for many business owners that can’t find the funding option they need through traditional routes. These asset-based loans are flexible and are viable for a wide variety of uses — regardless of the loan amount. So, if you’re looking for a workable solution that resembles the flexible nature of a business line of credit, this could be the perfect solution that you’ve been looking for.
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Frequently Asked Questions
Asset based-loans allow businesses to leverage collateral so the business lender can secure their lending interests and reduce risk, which provides a higher likelihood of approval. This product is great for businesses that are deficient in other areas of the underwriting process as a compensating factor in making an offer of the credit decision.
Asset based loans are no less difficult than traditional business loans to get approved for. There are still minimum requirements other than assets to get approved, such as credit, cash flow, and financials that will be evaluated. An asset-based loan is typically harder to get approved for than other alternative business loans and advances.
It is unlikely, but possible. If you have bad credit, you may get asset based loans if the collateral provided is highly valuable versus the amount of the loan. Keep in mind the rates, costs, and terms may be affected by how bad your credit is in the offer.
The short answer is no; you cannot get an asset based loan without providing documentation and some existing track record of revenue. An asset based lender requires these documents to mitigate risk.