Did you know that most business owners who apply for loans tend to take the old-school approach? However, this is not the right option for every company. Luckily, there are other outlets lenders offer to borrowers to own money like asset-based lending.
Read on to learn everything you need to know about asset-based lending.
What is Asset-Based Lending?
Asset-based lending refers to how much money a lender is willing to extend based on the value of the asset owned by the borrower. The asset is placed as collateral so that there is a guarantee the loan gets repaid.
To get approved by asset-based lending banks doesn’t necessarily depend on the credit score of the borrower. You get approved based on the value of the asset. If the borrower defaults, the lender can repossess the collateral. Assets tend to be real estate, equipment, inventory, or accounts receivables.
How Does Asset-Based Lending Work?
An asset-based lending broker can help you set up an asset as collateral so that you can get a loan from a vendor. You can take a look at advisors before setting up a meeting with a lender.
After an asset is put up for collateral, the lender offers a loan with a specific percentage. A lender will likely offer a large loan because the cost to monitor it is the same if it is a smaller loan.
Assets That Can be Used as Collateral
The asset-based lending process can go several ways depending on the collateral put up. A business owns a lot of things that could get a loan. These are the most common:
To use accounts receivable as leverage, you can get an invoice factoring asset-based loan. Based on the value of your outstanding invoices, a lender pays you a percentage. Through this loan, you receive a lump sum of capital, not 100% of the value of your outstanding invoices.
A bridge loan allows real estate to be served as collateral. This works if you buy a dilapidated property that you plan to revamp. A lender could offer you a bridge loan based on the future of the property.
Through equipment financing, you can enjoy the machinery you need and use it as collateral. Not making payments on the equipment leads to the lender repossessing it.
Inventory financing helps businesses purchase goods to sell later on. The inventory serves as collateral kind of like equipment does. If you cannot make payments, the lender is allowed to repossess the inventory so you cannot sell it.
Is Asset-Based Lending Right For Your Business?
Through asset-based lending, loans can get approved quicker compared to conventional bank loans. Asset-lending banks may charge you a higher interest rate than a traditional bank would and you may lose collateral in the end. By understanding asset-based lending, you can decide if it is the right loan path to take for your business.
Keep coming back for more articles on financing options for your company.