As businesses seek alternatives to traditional financing offered by banks, asset-based lending has become increasingly popular. This method of funding boosts your cash flow, enabling you to invest strategically in company growth, cover the costs of purchase orders, and handle ongoing expenses such as rent, utilities, salaries, and other company needs. Here is some information to help you decide if asset-based lending is the correct funding solution for your business.
How Asset-Based Lending Works
Approval for asset-based lending relies on the value of your company’s assets instead of its overall track record. Lenders typically structure these loans as revolving credit lines. The amount you can borrow is based on the value of the assets you use as collateral. These may include unpaid accounts receivable, real estate, equipment, or inventory. The quality of the assets determines the limits of the loan. For instance, you may be offered 80 to 85 percent of the value of receivables but only 50 percent of the value of inventory.
Benefits of Asset-Based Lending
Asset-based loans are easier to obtain than loans or lines of credit from traditional banks. If you have valuable assets that you can leverage such as accounts receivable from clients with good credit ratings, your funding application will probably be approved. The process of applying for and receiving the loan is also comparatively quick. Providing your spending is business-related, you have a lot of flexibility in how you use the funds. This financing helps your cash flow remain strong even if your business is seasonal or your company is in the process of growth.
Similarities Between Asset Based Lending and Factoring
Asset-based lending and invoice factoring are similar in that both financial solutions use company assets to provide you with funding. Both are effective methods of financing under the right circumstances. However, factoring involves the purchase of unpaid invoices by a financing company, while with asset-based lending, your assets become collateral for a loan. Asset-based loans are also less expensive than lines of invoice factoring.
For more advice on asset-based lending, contact Critical Capital Solutions.