Asset Based Loans for Small Businesses

Many small businesses these days have realized that a traditional bank loan is hardly the best option to get the financing they need. Today, you can’t just go to your local bank and apply for a loan unless you have a well-established company with a great credit history. If you’re a startup business, you’re likely to be rejected when you apply for a traditional loan. That means you have to be a little more creative in securing your finances. Non-traditional ways of raising money are now becoming much more common, including peer to peer loans, nonbank loans, cash advances, and leasebacks.

Asset based loans for small businesses are also becoming more popular. Even when mortgages (which are a type of asset based loan) aren’t considered, by 2008 asset based loans increased to $600 billion, and today that figure is even higher. In 2013 alone, more than $20.5 billion in asset-based loans were written in the US. Companies which made use of this method of securing finance include the tech giant Dell, the beauty product company Revlon, and the retailer titan J.C. Penney.

Who are Offering Asset-based Loans?

There are many institutions offering asset-based loans and they include banks and other financial companies. Now even hedge funds are offering these types of loans.

Who Can Qualify for Asset-based Loans?

According to the Commercial Finance Association (the US asset-based lending and factoring trade association), asset based lending has been used by a wide range of industries. Manufacturers are number one in the total market with 31%, followed by wholesalers (28%) and retailers (17%).

In general, lenders who offer asset based loans tend to approve the loan applications of businesses whose assets can be turned into cash right away if the situation demands it. These companies include retailers, restaurants, and other businesses that commonly take credit-card payments. Some asset based loan providers are also willing to advance cash with heavy equipment (usually used in farming and in manufacturing), real estate, and even patents as collateral.

The Terms of Asset-based Loans

The lending rates for these types of loans are generally lower than the interest rates charged by most credit cards companies. However, the rates may be higher than those found on traditional bank loans. What asset based loan providers look for are assets such as invoices, which are easier to convert into cash. The easier it is to turn an asset put up as collateral into cash, the lower the interest rate charged. For account receivables, lenders may front up to 80% to 90% of the value, while they may only grant capital of up to 50% or 60% of the value of hard assets like real estate or equipment.

Advantages of Asset-based Loans

These loans are becoming much more popular because they offer unique advantages for small businesses. These include a higher chance of approval and a speedier process for obtaining the loan. An asset-based loan is also great for companies with poor credit rating, since the quality of the asset used as collateral is much more important. Some lenders may also offer extra services such as credit reviews for customers, as well as payment processing and collection.

For many businesses, getting asset based loans means putting their future revenue on the line so that they can get the money they need to operate and grow. It’s generally a good deal for companies especially those who are just starting out.