Many business needs require additional sources of funds. For instance, maybe you need to clear your existing expenses, or perhaps, you need to expand your business. Whatever the case, you can access the funds within a short period, thanks to the vast array of alternative lending options. Asset-based lending, for instance, allows businesses to access loans by using collateral. Here is a sneak peek about asset-based lending.
What Is Asset-Based Lending?
It is a general term that refers to all loans which need collateral. The collateral, which is usually the asset, prevents the risk of default, as the borrower can claim for its ownership in case of default. A business can use its accounts receivables, machinery, stock, or any other asset as collateral.
How Does It Work?
Lenders use your business assets to determine the specific amount you can qualify for. If you intend to use accounts receivables as the collateral, the lender will calculate their value, and offer 80% of the total value of the invoices. If you provide equipment or stock as security, your lender might offer nearly 50% of the current market value of the asset. Some lenders may accept real estate, but the loan offer may be lower since it is not easy to convert the real estate to cash. Any business can benefit from the asset-based loans, provided that they meet the minimum requirements.
What Are Its Benefits?
Some of the benefits asset-based lending include:
- Easy to obtain – the application process for asset-based loans is simple and straightforward. Their documentation requirements are fewer than those of traditional loan institutions.
- Lower interest rates – the presence of collateral makes the interest rates lower.
- Customized lending – many lenders offer customized loans according to the particular needs of the borrower. The lending package includes expert advice.
- Flexible restrictions – how the borrower should use the loan
Who Can Use Asset-Based Lending?
The lending is ideal for all the businesses that need to grow but have cash flow problems. The loans are usually short term, and thus help the company to solve its immediate cash crisis. The borrowers must, however, meet the minimum requirements, which include having business assets whose value matches the borrowing needs. The assets should not be used as security to another lender. Moreover, the firm must not be having legal issues or tax problems.
Asset-based lending allows borrowers to use their business assets to get loans. The loans are easy to borrow and have lower interest rates because they are secured.