Turning Your Assets Into Flexible Working Capital

A closer look at asset-based lending

For small business owners, securing debt is a part of running a business. A business couldn’t survive without working capital, so business owners get creative on how to secure funding. Bank loans are often at the top of the list, but it’s not easy to qualify for one. If bank loans aren’t for you, there’s a funding solution you might want to consider – asset-based lending.

Asset-based loans have become increasingly popular over the past years. Unlike traditional business loans, asset-based lending will help you maximize your borrowing capacity and lets you free up working capital.

What is Asset-Based Lending?

Asset-based lending is a type of loan secured by collateral, such as accounts receivable, inventory, machinery and equipment, purchase order, etc. Simply put, you can loan money based on the value of your assets.

In the past, business owners considered asset-based lending as the last resort. But over the past few years, the number of business owners applying for an asset-based loan has increased.

Small businesses in the intermediate growth phase (businesses that have outgrown factoring, but still don’t have the track record to qualify for less expensive loans) are often the ones applying for an asset-based loan.

Why Should You Apply for an Asset-Based Loan?

There are many reasons why business owners apply for small business loans. Other than needing extra working capital, you can also use the funds from an asset-based loan to restructure or expand your business. An asset-based loan can come in handy during times of economic growth. Here are some of the reasons why you should apply for one:

  • Restock your inventory.
  • Expand your products and services.
  • Advertise your company.
  • Pay for marketing and promotion.
  • Expand business operations.
  • Make payroll.
  • Raise capital for business acquisitions.
  • Refinance existing debt to free up cash flow.

Who can Benefit from Asset-Based Lending?

When your small business is growing quickly, you’ll need enough working capital to fund growth opportunities and meet increasing demands. The lack of financial resources amid tough competition will negatively impact your business. An asset-based loan gives you a chance to thrive and compete in a dog-eat-dog industry.

Asset-based loans are best for business to business (B2B) industries because most B2B businesses tend to have more collateral than business to customer (B2C) industries. Transportation, manufacturing, staffing, technology, construction and wholesale are just some of the industries that benefit from asset-based loans.

How Does the Asset-Based Loan Process Work?

Before applying for an asset-based loan – or for any type of loan, you should evaluate your business to see if you would be a good candidate for financing. Ideally, your business should be past the initial startup stage to qualify.

To increase the chances of approval, good candidates for an asset-based loan should:

  • Have marketable/high-value assets
  • Have good financial statements (profit and loss statements, balance sheet, business tax returns, etc.)
  • Have collateral (accounts receivable, equipment or inventory) that has no liens
  • Have practiced great invoice and collection strategies

If your business possesses the criteria, you may be able to apply for an asset-based loan and receive funding based on the value of your collateral.

The Best Asset-Based Lending for Your Business

If your business owns high-value assets, you might want to free up working capital by applying for asset-based lending.

Rumzz Bajwa is a content marketing contributor at SMB Compass. A writer by day and a reader by night, she is also a big music lover and foodie. 

Categories: Finance