Asset Based Loans: A Definitive Guide for Small Business Owners
Finding the right financing can take time and energy away from focusing on your business. One of the more straightforward lending options is an asset based loan. Here’s a guide to help you understand asset based financing.
What are Asset Based Loans?
Business assets like accounts receivable, equipment, and inventory are used as collateral for the loan. You’re borrowing against future revenue.
The value of an asset based loan is linked to a high percentage of receivables (typically 70 to 80 percent) and about 50 percent of inventory, reflecting the amount of money the lender believes can be collected if you’re unable to make payments.
How to get an Asset Based Loan
If your business is a start-up or relatively young, make sure your financial statements are detailed, accurate and current, and that you have strong reporting systems. If your inventory is a commonly sold product and your customers pay on time, then lenders will be more open to partnering with you.
Discuss your long-term business plan and demonstrate you understand your business. Your credibility and vision will help make the lender comfortable taking on the risk of the loan.
Advantages of Asset Based Loans
For small businesses needing capital for growth or a short-term financial boost, asset based loans deliver. Service companies, manufacturers or distributors with seasonal or cyclical sales find asset based loans useful for maintaining cash flow. An asset based loan is a solid option for acquisition financing.
Disadvantages of Asset Based Loans
Your loan amount will be tied to receivables that will be paid in under 60 days or those from customers with strong credit. If receivables center in individual customers or small businesses, you may not have sufficient qualified value. Cost is higher than traditional loans and may include an audit and due diligence fees. Customers will send payments to the lender, giving cash flow control to an outside agency.
Our team at Muth Capital can help determine if an asset based loan is right for you.