Asset-based lending was once regarded as a last-resort financing option but today, it is getting more and more popular with businesses that don't have the track record, credit rating and sometimes patience to chase after the more traditional sources of capital funding. But what exactly is asset-based lending? And are all businesses good candidates for it?
Defining Asset-Based Lending
Simply put, asset-based lending is taking out a loan that is secured by a company asset. So if the borrower defaults, the assets will be seized by the lender. Asset-lending is a good alternative to traditional bank lending.
Who Qualifies for Asset-Based Lending?
Most asset-based lenders are drawn to work with companies that have collaterals that can be easily liquidated as cash if the need arises. Examples of good candidates are restaurants and even retailers that accept credit-card payments from customers. However, asset-based lenders can also put up cash against real estate, patents, machineries, as well as heavy equipment used in farming or manufacturing.
Asset-Based Lending Terms
Lending rates are usually higher than the traditional bank loan but are lower than most loans taken out of business credit cards. The going consensus is, the easier it is to liquidate the asset that's put up as collateral, the lower the interest rates will be. Most lenders that give out these kinds of loans will only give roughly 60% of a hard asset's value and about 80% of the accounts receivables' value to the borrower.
The Benefits of Asset-Based Lending
There are many benefits to availing of asset-based lending. For one, these types of loans can be obtained more quickly than traditional ones. Since a lot of asset-based lenders concentrate on granting loans to specific industry types, they are more inclined to craft terms that are based on elements that are particular to those business sectors. Some lenders even offer additional services like collections and payment processing.
So the businesses that will benefit the most out of asset-based lending are those, which have entered a "distressed phase" or the ones with short track records. These are usually the ones who have a hard time getting approved for bank loans.
The Drawbacks of Asset-Based Lending
Because asset-based lenders tend to focus on the property or asset being used as collateral rather than track record or credit-worthiness; they do the deals that most traditional banks or lenders avoid. Potential borrowers will provide inventory, account receivables, equipment, and other liquid assets in exchange for funds.
The main drawback is the relatively high rates, plus, you are giving the lender the legal right to seize your asset if you missed your regular payments. While traditional lenders give the borrowers a bit more leeway in cases of dire financial difficulties, asset-based lenders can't guarantee such things. Clearly, asset-based lending can help a lot of businesses stay afloat especially. But as a business owner, your primary responsibility is to check the viability of your options. See if the venture that needs funding is worth the high interest rates you are facing.
If you are convinced that it is worth the risk, then go for asset-based lending in order to fund your business needs.
Defining Asset-Based Lending
Simply put, asset-based lending is taking out a loan that is secured by a company asset. So if the borrower defaults, the assets will be seized by the lender. Asset-lending is a good alternative to traditional bank lending.
Who Qualifies for Asset-Based Lending?
Most asset-based lenders are drawn to work with companies that have collaterals that can be easily liquidated as cash if the need arises. Examples of good candidates are restaurants and even retailers that accept credit-card payments from customers. However, asset-based lenders can also put up cash against real estate, patents, machineries, as well as heavy equipment used in farming or manufacturing.
Asset-Based Lending Terms
Lending rates are usually higher than the traditional bank loan but are lower than most loans taken out of business credit cards. The going consensus is, the easier it is to liquidate the asset that's put up as collateral, the lower the interest rates will be. Most lenders that give out these kinds of loans will only give roughly 60% of a hard asset's value and about 80% of the accounts receivables' value to the borrower.
The Benefits of Asset-Based Lending
There are many benefits to availing of asset-based lending. For one, these types of loans can be obtained more quickly than traditional ones. Since a lot of asset-based lenders concentrate on granting loans to specific industry types, they are more inclined to craft terms that are based on elements that are particular to those business sectors. Some lenders even offer additional services like collections and payment processing.
So the businesses that will benefit the most out of asset-based lending are those, which have entered a "distressed phase" or the ones with short track records. These are usually the ones who have a hard time getting approved for bank loans.
The Drawbacks of Asset-Based Lending
Because asset-based lenders tend to focus on the property or asset being used as collateral rather than track record or credit-worthiness; they do the deals that most traditional banks or lenders avoid. Potential borrowers will provide inventory, account receivables, equipment, and other liquid assets in exchange for funds.
The main drawback is the relatively high rates, plus, you are giving the lender the legal right to seize your asset if you missed your regular payments. While traditional lenders give the borrowers a bit more leeway in cases of dire financial difficulties, asset-based lenders can't guarantee such things. Clearly, asset-based lending can help a lot of businesses stay afloat especially. But as a business owner, your primary responsibility is to check the viability of your options. See if the venture that needs funding is worth the high interest rates you are facing.
If you are convinced that it is worth the risk, then go for asset-based lending in order to fund your business needs.
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