Wouldn’t it be amazing if you can borrow money simply on your word that you will pay it back? Sadly, that’s not how it works. Far from it. Many banks have very rigid lending requirements in place. Recent news articles report that there’s a surge in approval rates at big banks, but actually as of March 2015 big banks only approve 21.6% of small business loan applications. So if you want to increase your chances of getting a loan, you may have to resort to assets based lending.
What is Assets Based Lending?
Most of the time, assets based lending involves risking your future earnings to get access to capital immediately. The typical assets lenders accept are your accounts receivables and your inventory. These assets represent money in the future, and your lenders are willing to give you an advance against it now.
Other lenders may also accept equipment and real estate as collateral for a loan. The money you can borrow will depend on the valuation of the equipment and/or real estate. Of course, these assets must be encumbered and free to use as collateral. They should not be embroiled in any legal or accounting issues and they’re not already used as collateral.
Typically, you can borrow as much as 80% of the value of the accounts receivable. You may also borrow half the value of the inventory, equipment, and real estate.
Getting approval for assets based lending is also not just a matter of having the appropriate assets. You’ll still need to show documentation that your business has good financial statements and reporting systems, and that your inventory is very easy to sell. You also need to demonstrate that your customers have a good history of paying fully and on time.
Advantages of Assets Based Lending
This form of financing can be very helpful if your business is undercapitalized, in the process of a turnaround, or on the way to rapid growth. That infusion of cash you get may be the final tool you need to set your business into a stable and profitable future.
These loans can also be used to finance acquisitions for growth. Another suitable candidate is a company with seasonal needs and industry cycles which often result in cash flow difficulties. The loan can help them get the cash flow problem straightened out.
Drawbacks of Asset Based Lending
First of all, the chances of securing a loan or a line of credit is only as good as the quality of the assets you possess. The lenders often only approve of accounts receivable as collateral when your customers have stellar credit and they pay in less than 60 days.
The interest rate for assets based lending may also be higher than traditional bank loans, and some lenders may even require you to personally guarantee a loan. Some lenders also insist that your customers send their payments directly to them, and the lender will only pass on the payment to you after they have taken out the advance plus interest. Nevertheless, this form of financing gives you another option besides traditional bank loans.