In a perfect world, as a small business owner you can borrow money without collateral and lenders will just take you at your word. But then again, in a perfect world you probably wouldn’t even need additional financing. In the real world however, you may have to approach asset based lending companies to provide necessary funding for your business.
What Are Asset Based Loans?
Asset based loans are what you get when your business needs to boost your working capital because you’re having cash flow difficulties. Often this is not a case of poor market conditions, but actually a consequence of rapid growth.
For example, you’ve received a lot of purchase orders which offer a lot of profit opportunities for your business. But each purchase order requires a sizable investment because your suppliers are demanding payment upfront.
Or you can be a manufacturing firm and the demand for your products has suddenly tripled, so you open another manufacturing plant which again costs a substantial amount of money.
If your small or midsized business is trying to expand, but it is basically stable and have financeable assets, then this growth can be accommodated properly. Some lenders don’t even mind if your business doesn’t have a very high credit rating or a long track record.
Which Types of Assets Are Eligible?
The most typical assets accepted by asset based lending companies are accounts receivables. But other assets may also be accepted. These assets include the expensive equipment you use, the real estate the business holds, and the inventory of products.
What’s important here is that these assets must not be involved in any tax, legal, or accounting issue. If they are to be used to secure the loan, then they should not be already pledged as collateral to another lender, unless that lender agrees to subordinate its position. In other words, if your business is unable to pay off the loan, then the asset based lending company gets first dibs on your assets to pay off the loan.
The asset based lending companies inspect the assets and then offer a percentage of the value of the assets. Usually, with accounts receivables you may be able to borrow as much as 80% of the value of the ARs. For equipment and inventory, the money you can borrow is usually no more than 50% of the value.
Lenders may usually inspect the assets regularly especially when they involve equipment or inventory, and these inspections will be part of their fees.
Difference between Asset Based Lending Companies and Factors
When you deal with asset based lending companies, you are essentially borrowing money. While this may seem similar to factoring when you use ARs, with factoring you’re not borrowing money at all. Instead you’re selling your ARs.
Also, in factoring the factor is involved in the collection process. In fact, your customers pay the factor directly and they forward your money to you after they have deducted their fees. While many lenders now also prefer this approach, other asset based lenders may not have any contact with your customers.