What Is Asset-Based Lending?

Asset-based lending involves using an asset or collateral to secure business financing, which can be in the form of a loan or line of credit. This collateral doesn’t necessarily have to be real estate; it can also include liquid assets such as receivables, inventory, purchase orders, and sometimes equipment.

Qualifying for asset-based lending doesn’t heavily depend on your credit score or credit history. Instead, your eligibility is based on the value of your assets like receivables, inventory, etc. This type of financing provides immediate access to working capital, allowing you to cover expenses related to growth, expansion, inventory purchases, and more.

How Does Asset-Based Lending Work?

Asset-based lending functions similarly to other business financing methods, providing funds for business growth and repayment over time. The unique aspect of asset-based lending lies in using an asset (explained below) as collateral. While real estate is an option, there are simpler, easier, and less risky alternatives available.

Cash flow challenges, common for both new and established businesses due to rapid growth or slow-paying customers, can be addressed through asset-based lending. By leveraging assets like receivables and inventory, this financing avenue unlocks immediate cash. Many businesses turn to asset-based lending for working capital needs, seasonal slowdowns, or managing slow-paying receivables.

Collateralizing an asset reduces the lender’s risk and instills confidence, often resulting in lower interest rates. However, interest rates can vary based on several factors.

Lenders generally prefer highly liquid assets such as receivables over less liquid options like equipment. Nevertheless, using equipment as collateral can still lead to favorable financing options.

Types of Assets You Can Use as Collateral

Asset-based lending hinges on collateral, but it doesn’t necessarily require physical assets like land or real estate. There are various types of collateral you can leverage to secure term loans or lines of credit and increase your borrowing capacity.

However, it’s important to note that lenders value certain assets more than others. Assets with higher liquidity are generally preferred as they offer greater security with lower risk. Nevertheless, you can still use less liquid assets like land and real estate, especially when combined with other assets to enhance security.

Accounts Receivable or Invoices
Utilize outstanding invoices from customers to access new funds and invest in your business’s future growth.

Inventory
Offer unsold inventory as collateral. While its value may be based on wholesale rates rather than market rates, it can still provide substantial leverage.

Purchase Orders
Rather than rejecting future sales due to capital shortages, convert upcoming sales into immediate cash for materials and seize business opportunities.

Equipment
Use tangible assets, like equipment, to secure financing. The easier it is for a lender to resell the equipment, the more effective it is as collateral.

Real Estate
Real estate offers additional security for lenders, especially in hard money lending. However, it’s most effective in asset-based lending when paired with more liquid assets. It serves as secondary collateral and can help you qualify for additional financing when receivables alone are insufficient.

Not sure which collateral is suitable for your asset-based lending application? Discuss your available assets with your lender after applying to determine the best option based on your specific needs.

The Advantages of Asset-Based Financing

In today’s business lending landscape, numerous options exist that don’t necessitate offering assets as collateral. However, opting to use assets as collateral can be advantageous when seeking immediate cash.

Here are several reasons why your expanding business should explore this often-overlooked financing avenue:

• Obtain cash for business growth without pledging real estate.
• Asset-based loans and revolving lines of credit offer swift and straightforward approval processes.
• Qualification is possible for young or new business owners, provided you possess the required assets.
• Assets mitigate the lender’s risk, typically resulting in lower interest rates for you.
• Leveraging an asset increases your borrowing capacity, allowing you to access higher funding amounts.
• Fast approvals are achievable by demonstrating ownership of the asset, facilitating an immediate boost in cash flow.

ABL: Banks Vs. Marketplaces

Where should you seek an asset-based loan? Consider these factors to find the optimal choice for your small business.

Banks offer lower interest rates but entail a lengthy application process and turnaround time. They also set higher credit score and sales expectations. While you might qualify, you’re limited to one option, which might not align with your needs. Choosing the wrong asset-based loan could result in years of repaying a loan that doesn’t benefit your business.

On the flip side, marketplaces streamline the application process and typically have access to a wide range of lenders and finance companies. Many of these are asset-based lenders specializing in specific industries and collateral types. Top-notch marketplaces ensure easy matching with relevant options, empowering you to select the most suitable one.

Qualifying for Asset-Based Lending

Interested in qualifying for asset-based lending? The process can vary depending on your chosen avenue.

Banks often have lengthy turnaround times and complex procedures, despite the reduced risk associated with your assets. While they may offer slightly lower rates, these advantages come with extended review processes and potentially lower funding amounts. If you’re not worried about losing opportunities or falling behind competitors, this option might suit you.

Alternatively, marketplaces offer a simpler and quicker qualification process, allowing you to review multiple options efficiently. Here are the qualifications set by National Business Capital:

• $500K in Current Receivables
• Assets or Collateral

Lenders approve your borrowing based on the posted value of your collateral on the balance sheet. The higher the value of your assets, the more comfortable lenders will be in approving your business for funding.

How to Use Asset-Based Loans

Asset-based lending provides a quick and straightforward solution for obtaining fast cash to meet urgent working capital needs, with generally no restrictions on how you can utilize these funds.

Here are some ways you can use asset-based lending to benefit your business:

Fuel Business Growth:

Take strides towards growth and expansion by opening new locations or expanding your product/service offerings.

Fund Inventory Purchases:

Acquire inventory in larger quantities to reduce costs and boost profits, especially during peak demand periods.

Fill New Orders:

Invest in growth by purchasing materials required to fulfill incoming orders, overcoming high upfront costs.

Cover Operating Expenses:

Manage increasing operating expenses like rent, insurance, and more with the help of asset-based loans or credit lines.

Maintain Cash Reserves:

Have extra cash readily available to seize new revenue-generating opportunities as they arise.

Navigate Slow Seasons:

Cover essential expenses such as payroll, operating costs, and marketing during slow seasons when revenue may dip.

With additional working capital at your disposal, you can allocate funds towards any expenses that contribute to the growth and success of your business.

Examples: How Industries Use Asset-Based Lending as a Financing Tool

Asset-based lending presents a practical avenue for accelerating your business growth, eliminating the wait for working capital to meet your needs adequately.

Businesses of all sizes, from small to large, can leverage asset-based lending early on to foster growth. Here are examples illustrating how companies in various industries have utilized asset-based lending (ABL) to expand:

eCommerce:
Rapidly growing eCommerce ventures utilize asset-based financing to procure more inventory, ramp up marketing efforts, and attract new customers amidst increasing demand.

Marketing & Technology:
Marketing and technology firms with a growing client base often leverage ABL by selling agreements to access additional funds, propelling their growth trajectory.

Textile & Shoe:
Fast-expanding textile and shoe enterprises frequently turn to ABL for acquiring supplies and inventory in preparation for bulk transactions.

Wholesale:
ABL ensures wholesalers have the necessary funds for significant transactions, especially during the initial stages, when high-ticket deals can yield substantial returns.

Gas & Oil:
While distribution in the gas and oil sector can yield lucrative profits, purchasing supplies can pose cost challenges. Asset-based loans frequently bridge this gap.

Medical Supply:
Distributors, particularly those dealing in PPE, commonly utilize asset-based lending to secure bulk inventory orders at the most competitive rates, ensuring cost-effectiveness.