Asset Based Lending For Small Businesses

Small Businesses

Asset-based lending is the best method for startup companies and businesses with poor credit scores and finances and required large loans that they receive from lenders. Various other small business companies go for loans from other mediums or banks in which it is hard to qualify and takes a long period to assess the money. Asset-based loans are best for your company as long as you have valuable collateral to exchange in return for cash. 

We will discuss everything that you must know about asset based lending for small companies and businesses. 

What is Asset Based Lending?

Asset-based lending is a practice that has been around the industry as long as lending has existed. The procedure is nothing but the advance of money based on the valuable assets of the company. However, suppose the assets’ values are around or more than a hundred dollars, in that case, the lenders feel comfortable giving your company an advance of up to a hundred dollars as the company’s assets secure the deposit. 

The question that arises is that on what basis is the advance made by the lending company? The hundred dollar company assets can also let the lender give away seventy-five or fifty dollars. There are various factors that the lender considers before giving the advance money and the actual cash to the borrowers. 

The simple answer is that the more a company has liquid assets, the higher chance the asset-based lender will provide more cash. There is a saying that to make money, you need money. Although most people do not believe in the statement yet, various fundamental truths prove the statement. 

The Advantages and Disadvantages of Asset-based Lending

Asset-based lending is better than bank loans and other private sectors that lend money for the business. However, there are various pros and cons to it. 

Pros of Asset Based Lending

Here are some of the benefits of using asset-based lending for operational business capital. 

  • Flexibility: The basic benefits of an asset-based loan are that when a company requests a loan on assets, the amount is flexible as per the company’s assets. With strong, valuable support, the company can be assured of a better agreement with a good history of credit, unprofitable business, credit issues, and underperforming. Companies can use this procedure to get instant working capital for their company to have a better workflow.
  • Maximum Proceeds: Many other loans provide the full benefits of asset-based loans for companies in many cases. 
  • Consistent Reporting: Asset-based lending requires frequent and consistent reporting. These include monthly reports, borrowing bases that many companies do not organize for themselves. 
  • Cash Management: The finance reporting that comes with asset-based loans helps companies have an organized cash management system. 

Cons of Asset-Based Loans

The increase of liquidity with the help of assets is a great deal for companies; however, it has its downsides. 

Takes Time: The asset-based loans are time-consuming, although the lenders are looking for better ways to improve their customer experience. The time consumption states that only companies with strong assets and financial reporting are likely to enjoy the benefits of these loans. 

Monitoring: Another downside of asset-based loans is that it requires monitoring of reports and activities by the company that the lender has provided the money to ensure easy flow of activities. Various audits and field reports are examined by the lenders as an update to manage their loans. 

What Kind of Assets are Used to Approve an Asset Based Loan?

Asset-based lending loans are approved as a different structure and provide a desirable amount to lenders. Various lenders lend money on machinery and equipment along with real estate. Some of the common assets that are accepted to secure the loan are-

  • Product inventory
  • Machines
  • Buildings
  • Receivable Accounts
  • Special equipment
  • Real estate

There are several asset-based loan providers in the market today that focus on a single type of asset. They are expert in their work field and focus on one type of asset only. However, intellectual property is an uncommon asset that is used as collateral for money. Most lenders ignore these, but they would still be more comfortable lending money against individual properties. 

Final Words

Almost every business can use asset-based lenders’ benefits as it will help them generate capital for new projects and run the company. Small and mid-size companies can find the best use of these loans because of their growth, acquisition, and turnaround. Companies with fixed assets, better financial records are viable for using these loans for their profit.