Asset-based loans are a type of financing that allows businesses to obtain loans based on the value of their assets. The lender uses the value of your business’ assets as collateral for the loan.
Asset-based lenders lend money based on an asset’s value rather than relying strictly on a borrower’s credit score.
The primary benefit of using asset-based lenders is that they don’t rely on traditional credit scoring methods. Instead, they look at the value of your assets as collateral for the loan.
This can be helpful if you have a poor or limited credit history because it will allow you to access funding that may not be available through traditional means.
However, it also means that your application will be subject to more stringent scrutiny than traditional loans.
What Is an Asset-Based Loan?
An asset-based loan is a type of financing that uses your business’s assets as collateral to secure the loan. If you have valuable equipment, real estate, or other items that can be sold if you default on the loan, an asset-based lender can help you get funding for your business. The lender may take possession of the property if you fail to make timely payments.
Here’s how it works: You pledge some or all of your assets, such as cash, stocks, bonds, and real estate, as collateral for a loan. The lender will evaluate the value of your help and determine how much money you can borrow based on those assets’ value.
An asset-based loan has several advantages over traditional loans. For example:
They often come with lower interest rates than other types of loans. The lender has to take certain risks when issuing an asset-based loan. But they are assured that they can recover all or part of their money when they hold your assets as collateral.
Second, asset-based lenders may be more willing to work with you if you have bad credit or no credit history.
Even if you don’t qualify for traditional loans based on your income or credit score, some lenders may still consider issuing an asset-based loan based on the value of your assets and the likelihood that you’ll make good on your payments over time.
Finally, many asset-based lenders offer flexible payment plans that align with seasonal fluctuations in business revenue and expenses. You don’t have to make regular monthly payments like other loans.
Who Uses Asset-Based Lending?
Asset-based loans are not available to just anyone, however. It would help if you had a business with valuable assets that could be used as collateral for the loan.
For example, if you own a car dealership, the cars you sell can be used as collateral for an asset-based loan. If you own a repair shop, the tools and machinery in your shop could also be used as collateral for an asset-based loan.
In most cases, asset-based lenders require that you have been operating your business for at least six months before they will consider giving you an asset-based loan. If you’re starting with your business idea, it may take some time before you qualify for an asset-based loan.
The asset-based lending process is used by a wide variety of businesses, including:
- Companies that need financing for equipment and machinery.
- Businesses need funding to purchase a new building or add to an existing one.
- Businesses that need financing for inventory purchases.
- Companies that need working capital loans to support their day-to-day operations.
In general, asset-based lenders provide merchant cash advances, business lines of credit, and invoice factoring services to small business owners with good credit and ample assets to put up as collateral.
Who Qualifies for Asset-Based Loans?
Asset-based loans are a great way to help build your business credit. Small businesses and startups often use them, but established companies with solid assets can also use them. The key is to have assets such as inventory, equipment, or accounts receivable that can be used as collateral against the loan.
If your business has been in operation for at least six months and you’re looking for a short-term loan, an asset-based loan might be right for you.
The good news is that you don’t have to be a millionaire to qualify for asset-based loans. The bad news is that it’s not as easy as it may seem. Asset-based lenders require borrowers to have an established business or a viable business plan.
They also look for signs of financial stability, such as personal income and existing assets.
The requirements to qualify for an asset-based loan are the same as those for any other type of business loan. The lender will look at your credit score, income, and personal debt load. However, other factors impact your eligibility.
This is where the asset-based loan gets its name: you must have assets that can be used to secure the loan. It could be real estate or a piece of equipment or machinery for your business.
If you plan to purchase these items with an ABL, the lender will want proof that you can do so, such as a letter from the seller or title company stating they have accepted your offer on the property in question.
For example, if you want a $100,000 asset-based loan, you need to have $100,000 worth of assets that can be used as collateral. This could be equipment, vehicles, or even real estate like land or a building your business owns.
Once the bank has this collateral, they will lend you money against it so that you can use it as capital for your business.
The lender wants to know that your business will generate enough money every month to pay back what it owes them. They’ll look at your current financial records — including income statements and balance sheets — to make sure you’re making enough money (or are capable of doing so).
Liquid Assets That Are Available for Collateral
Assets such as stocks and bonds, real estate investments, or other items that can be sold quickly are often used as collateral in asset-based loans. These types of assets can be sold if you don’t pay back your loan on time.
A Good Credit Score
A good credit score will help you get approved for a more considerable loan amount because lenders see this as a sign that you’re less likely to default on the debt.
You also need to provide proof of insurance on each item being used as collateral, along with an appraisal report from an independent third-party appraiser who has been licensed by a state agency or department of insurance.
What is the Cost of an ABL?
The cost of an ABL is not a one-size-fits-all solution. The interest rate and monthly payments are dependent on several factors that are unique to your business, including:
The amount you borrow. Larger loans typically have lower interest rates. For example, the average small business loan is about $50,000 and has an annual percentage rate (APR) of 9 percent or less.
How long do you take to pay back the loan? Longer terms generally mean lower monthly payments but higher interest rates. If you’re unsure how long it will take to pay back your loan, check out this handy calculator from Freddie Mac that can help estimate how much money you may owe at the end of different terms.
Your credit history and income. Borrowers with solid financials will likely qualify for better rates than those applying with a subpar score or income level.
The cost of an ABL is typically a fixed-rate, meaning that it does not change over time. However, there are some cases where the interest rate can be variable based on changes in market rates.
How is an Asset-Based Loan Different from Factoring?
If you want to know the difference between asset-based lending and factoring, it’s essential to understand the basics of these two lending methods.
Asset-based lending is a type of financing that uses your business’s assets as collateral for loans. The lender uses your company’s accounts receivable, inventory, equipment, and other assets as collateral for a loan. The lender then holds on to these assets until you repay the loan.
In contrast, factoring is a cash flow solution that allows your business to sell your accounts receivables to a third party. Instead of waiting 30 or more days for your customers to pay their bills, you can immediately receive an advance on those payments.
The third party will purchase your invoices at a discount, usually around 90% of the face value of each invoice, and then collect payment directly from your customers.
This type of financing allows your company’s working capital needs to be met immediately without waiting for customers’ payments or sitting on large amounts of money in accounts receivable.
While it is similar to factoring, you get paid immediately; there are some differences.
The main benefit of an asset-based loan is that it allows businesses with irregular cash flows to obtain capital quickly and easily — without having to wait months or years for approval from a bank or other financial institution.
A factoring company buys your invoices at a discount and sells them to investors as promissory notes at total face value. They usually charge fees for this service, but it can be quicker than waiting for payments from slow-paying customers who have gone out of business altogether — especially if you have large accounts receivable balances or high-risk customers (e.g., those who frequently go bankrupt).
Should I Choose Factoring or Asset-Based Lending for My Business?
If you have a business, chances are you might need some financing. There are many ways to get credit for your company, but there are two main categories: factoring and asset-based lending.
Factoring is a type of financing that allows your business to receive cash upfront on invoices that you have already been paid. Factoring is often referred to as invoice financing or accounts receivable financing.
The other major category is asset-based lending, which provides loans based on the value of assets owned by your business. Assets can include real estate and equipment and collateralized receivables such as accounts receivable (money owed to your company).
The big question for entrepreneurs is which type of financing is suitable for their situation?
Whether to use factoring or asset-based lending for your business depends on several factors. The first thing you need to do is determine how much working capital your business needs or how much cash flow you need at any given time.
Factoring is a great way to get cash in your hands quickly, and it can be beneficial if you want to grow your business quickly. It’s also ideal if you have a lot of accounts receivable that are coming due soon and need cash before the end of the month.
The benefit of factoring is that it helps businesses avoid working capital shortages and allows them to focus on growing their business instead of chasing down payments from clients. Factoring is perfect for companies with a lot of accounts receivable because they can generate quick cash without waiting for a customer to pay. This enables them to grow their business faster and expand into new markets or product lines.
The downside of factoring involves some risk, such as increasing bad debt and fees.
Asset-based lenders typically offer longer repayment terms and higher interest rates than other lenders, so they’re not always the best choice to get funds quickly.
On the other hand, asset-based lending makes sense for companies that want to maintain control over their assets without selling them outright and taking on debt to get funding for their business needs.
Sometimes it makes sense to take out a loan from an asset-based lender when you have multiple projects coming up that require funding over time — such as building out new offices or purchasing equipment — not just one big purchase like building a new warehouse or purchasing inventory for the holidays.
Questions to Ask Yourself About ABL Loans
If you’re thinking about taking out an ABL loan, it’s essential that you know what you’re getting into before making any decisions. Here are some questions that you should ask yourself about ABL loans before deciding whether or not to pursue them:
Is Your Company New?
Many lenders require that the business be more than six months old before considering an ABL application. This is because ABLs are deemed riskier than traditional loans, so the bank wants to see that your company has been around long enough to be successful.
If you’re just getting started in business, it might not be the best time to take on more debt than you can handle. While ABL loans are usually smaller than traditional bank loans, they still require collateral.
If your startup isn’t generating revenue yet or doesn’t have any assets to use as collateral, an ABL loan may not be the right choice for you right now.
Do You Need Money Fast?
If your answer is yes, an ABL loan is probably right for you. These loans are designed for people who need money fast and don’t want to wait weeks or months for their application to be processed.
If you have good credit and can afford monthly payments, an ABL loan may be the best option for your situation.
How Much Money Do You Need?
This is the most critical question to ask yourself when thinking about taking out an ABL loan. If you don’t know how much money you need, it will be hard to figure out whether or not an ABL loan will work for you.
Before determining how much money you’ll need for expenses like tax payments, utilities, and maintenance costs, before deciding how much of a debt load you can handle.
Do You Want a Flexible Arrangement?
An ABL loan can be a great option if you need flexibility in how much money you receive and how much time you have to pay it back. If you’re planning on buying something that may go over budget and want more time to pay it back, this can be an excellent choice.
With an ABL loan, you can draw down the funds in small increments—as little as $10,000—and repay them when needed. This makes these loans ideal for businesses that need financing on an ongoing basis.
Advantages of Asset-based Lending
Asset-based loans offer many advantages over traditional financing methods such as personal loans and credit cards:
You do not need good credit to qualify for an asset-based loan. Some lenders will even consider lousy credit applicants with poor scores and high debt loads because they know that these people have something valuable that can be used as collateral for their loan applications.
It is easier to get approved for an asset-based loan. There is no need for extensive paperwork or formal verification from banks and other financial institutions who may be reluctant to lend money without seeing proof that they will get it back one day!
Lower interest rates. One of the most significant advantages of an asset-based loan is that it usually carries a much lower interest rate than other types of financing. This makes it easier for your business to manage its debt load, which can help you avoid costly problems like missed payments.
Flexible terms. Asset-based lenders allow you to borrow money against your assets instead of your credit score, so they’re often more relaxed about what kind of terms they’ll offer you and how much money they’ll lend. You may get a more significant loan amount with a more extended repayment period than other financing options — especially if you don’t have great credit or haven’t been in business long enough to qualify for a traditional loan.
Final Thoughts on ABL Loans
ABL loans are a great way to get access to funds for your business. These loans are ideal for small businesses and startups that don’t have enough cash to qualify for traditional financing but have valuable assets such as real estate, equipment, vehicles, or inventory. They offer low-interest rates, flexible terms, and the ability to repay early without penalty.
The main drawback of ABL loans is that they may not be available to all businesses. To qualify for an ABL loan, you need a healthy company that can repay the loan on time. If you have trouble getting approved for an ABL loan, consider applying for a conventional business line of credit instead.
If you have good credit and a solid business plan, an ABL loan can help your company grow and take advantage of opportunities.