Asset Based Lending for Small Businesses
Simply put, asset based lending is any financing secured through the use of an asset as collateral. The asset might be available inventory, or it might be accounts receivable. This lending method is used when a typical bank loan or selling bonds to investors through capital markets are not options.
When it Makes Sense
Small businesses may want to explore asset based lending to address cash flow issues. Sometimes a successful manufacturing or service operation can be susceptible to seasonal fluctuations in business and sales. Likewise, there may be different demands on working capital at various points of the fiscal year. Putting an asset such as inventory or account receivables up as collateral can allow a small business to get funds quickly. It is not an option for big investments such as new equipment or the purchase of property. This action helps to do things such as stabilize payroll and meet operational costs in slower months.
A major benefit to a small business of an asset based loan is a lower interest rate. The rates are lower because the investor can seize and liquidate the asset tied to the loan in the event of default. For smaller companies, this can translate to significant monthly savings.
How It Works
In an asset based financing scenario, the borrower gets immediate cash by putting future revenue on the line. In the case of account receivables, or accounts that are billed out, a lender may advance funds based on 70% to 80% of receivables and 50% on inventory.
Who Offers Asset Based Lending?
There is a wide range of financial service companies that offer this type of lending, including most major banks. As with any loan, the borrower will need to produce good financial statements and demonstrate good reporting records. Asset based financing has been typically used to finance larger businesses, but many lending institutions will approve lending to a small business that demonstrates solid practices. A client base that pays its bills and inventory that moves quickly are positive factors for getting approval.
Not Just for Big Business
Small businesses can reap the benefits of asset based lending. The key is to approach lenders with confidence and to be prepared. A small business must be just as vigilant as the large operations about keeping meticulous records. It must also be able to assure the lender of its viability. It may be necessary for a small business owner to speak to more than one financial institution before finding the right fit. When an owner inspires confidence in a lender, an asset based loan can help ensure the continued success of a small business.