When you explore financing options, you may come across asset-based lending. These institutions rely on business assets to provide deposits. Every loan is unique, and most of them are business line credit. However, there are two types of lending, i.e., traditional business loans and business lines of credit. Likewise, the lender will look at the market value of your secured assets and offer a capital advance.
Besides, a business may borrow between 75% to 85% of the account receivables value. The business asset will be used to secure the financing, and the lender will be able to seize or sell them in the event of default.
Types of Asset Used
There are numerous types of assets you may use if you move forward with an asset-based lending institution. Here we mention a few of them.
Account receivables
If you invoice your client, you may use the receivables due within 30-90 days as collateral. The more you invoice, the more you’re eligible to borrow.
Inventory
Inventory may serve as collateral. This is the best option for those who are in the retail or wholesale business. A lender appraises the resale value of the inventory to secure the loan.
Equipment/Machinery
Your business may utilize high-value equipment or machinery; however, your business should own it.
Real Estate
Real estate also qualifies for collateral.
Pros
Some of the noteworthy benefits include
Quick application and funding
You have the option to apply for an asset-based loan quickly. As long as you meet the criteria, you may get approved and receive the funds.
Financial Stability
During tough times, these loans are a real lifesaver. You may use it to enhance your cash flow to restore your business stability.
Competitive Interest rate
Compared to other term loans, asset-based loans come with a lower interest rate.
Cons
The greatest drawbacks include
Asset risk
If you fail to repay the loan, your business assets will be at risk. The lender may take the equipment, inventory, assets and sell them.
Fees
Along with interest, there’s a chance that you’ll have to pay other fees as per the loan.
Borrowing limit
The amount you may borrow totally depends upon the value of the asset. Besides, you may not receive as much funding as you need.
Rates and terms
When it comes to asset-based loan rates, they vary depending upon the valuation. In most cases, rates range from 7% to 30%. Likewise, you need to keep that in mind that loan terms are inconsistent. The type of asset you possess has a significant role to play.
Conclusion
If you are a business owner with a growing business, the loan may be invaluable. Before you partner with a lender and move forward with a loan, you should always research and compare all other options available to you. Analysis, review, and recommendations are essential when securing a loan.
