When you use asset-based lending for commercial financing, you secure funds with your company’s property or holdings. If you do not repay the loan amount, the lender takes your assets.
Amount
Lenders base the amount of funding on a loan-to-value ratio. This ratio depends on the collateral you provide. The financial institution divides the loan amount by the asset value to determine your loan ratio. For example, if your loan-to-value ratio is 70%, the bank would only offer a loan that is 70% of your asset’s value.
Loan Collateral
You can choose property such as commercial real estate, business equipment, marketable securities, or accounts receivable to back your loan.
Rates
Your asset secures the loan, making funding less risky for the lender—lower risk results in lower interest rates. The percentage goes down based on the liquidity of the property you use as collateral.
Types
Asset-based lending is available in various forms, including:
- Term loans
- Merchant cash advances
- Lines of credit
- ACH financing
- Invoice factoring
Businesses
This lending type is a good choice for businesses with insufficient cash flow to qualify for bank loans, inconsistent revenue, or seasonal fluctuations. Companies with low credit scores or those that already have an SBA loan may also want to consider using a secured loan. You can also use this financing to consolidate other debts or as a second-position loan.
Advantages
Securing this loan type offers the following benefits:
- Lower interest rates: The bank can take your collateral assets if you fail to repay the loan, making it less risky for them. Low risk enables lenders to offer better rates.
- Fewer covenants: Banks do not require as many conditions or restrictions with this loan type.
- Easier to obtain than unsecured loans:Â Lenders have fewer processes to go through to approve your asset-based loan. They look primarily at your collateral offering and your financial standing.
- Fast funding process: If you meet the bank’s qualifications and have a collateral asset to secure funding, you gain immediate access to capital
- Flexibility: This type of loan does not have the same spending limitations as traditional loans offered for specific business needs.
- Improved credit portfolio: Securing an asset-based loan diversifies your portfolio. If you make timely repayments, your credit score increases.
If your business faces seasonal cash flow issues or other revenue fluctuations, asset-based lending may be a good option to cover your expenses during periods of low income. You can also use this loan type to fund expansions or take advantage of business growth opportunities.
