Are you considering an asset-based loan for your business? An asset-based loan (or asset-based lending) is a financing solution secured by tangible assets – or assets your business owns that can be easily converted to cash. Some of the most common types of collateral are equipment, accounts receivable, commercial real estate, and inventory.
The borrowing base, or the amount of money you can borrow with an asset-based loan, depends on the market value of your collateral. For accounts receivables (A/R), business owners can generally borrow up to 75% to 85% of the total value of the A/R. On the other hand, business owners can receive 50% of your inventory or equipment collateral.
Aside from determining your borrowing base, these tangible assets reduce the risk for lenders. It assures lenders that they’ll still get their money back even if you default on the loan. Asset-based lenders also have the right to repossess your assets in order to recoup their losses.
The assets you pledged to secure the loan are valuable assets. If you fail to repay the loan, lenders convert these assets into cash to make up for the losses. This is why potential lenders heavily consider the value of your assets before approving your loan.
Why Business Owners Apply For Asset-Based Loans
At a glance, asset-based loans seem like a bad financing option for business owners. After all, nobody wants to put valuable business assets at risk. But why do business owners apply for one? Asset-based loans offer one significant benefit – easier application.
Since business owners secure the loan with collateral, this mitigates the risk to the lender. This means that it might be easier to qualify for a secured loan than an unsecured loan. However, you still need to comply with the requirements of the loan. Most lenders require business owners to undergo comprehensive due diligence as well.
Are Asset-Based Loans Right For You?
As a business owner, only you can decide whether you should pursue an asset-based loan or not. But the choice becomes clear to you once you review your business’ financial history, projected financial growth, and the value of the assets your business owns. At the end of the day, choosing to apply for an asset- based loan ultimately depends on your situation.
If you have great personal and business credit scores, a strong financial history, and a few years of business operations, you might want to consider applying for unsecured, traditional loans instead.
On the other hand, if your business is rapidly growing and you own assets that can be easily liquidated; asset-based lending is the perfect solution if you need additional working capital. This is especially true for business owners who have a hard time qualifying for traditional loans.
Apply For An Asset-Based Loan Today
If you think applying for an asset-based loan is right for your business, SMB Compass can help. To know more about business loans, you can talk to one of our lending experts today. Give us a call at (888) 853- 8922 or email us at info@smbcompass.com.
