What is Asset-Based Lending, and How Does It Work?
As a business owner looking to obtain funding to grow your company, you’ve probably heard of asset-based lending before. If traditional loans aren’t accessible, AB-lending may be the solution you’re looking for. Asset-based lending is a type of financing that allows you to use your assets, such as accounts receivable, inventory, and equipment, as collateral for a loan. Read on to learn more about how asset-based lending works and how it can benefit your business.
How does asset-based lending work?
Asset-based lending is based on the value of your assets. When you apply for asset-based financing, the lender assesses the value of your assets and determines how much they are willing to lend you. They will place a lien on the assets used as collateral. If you default on the loan, they can possess your assets to recover their funds.
Accounts receivable financing is one of the most common forms of asset-based lending. In this case, the lender will advance you a percentage of the value of your outstanding invoices, usually around 80%. The lender collects the payment and deducts their fees and interest before releasing the remaining funds to you once the customers pay their invoices.
Inventory financing is another type of asset-based lending, wherein the lender uses your inventory as collateral for the loan. The lender assesses the value of your inventory and lends you a percentage of that value. You repay the loan when you sell the inventory. Equipment financing is also a popular form of asset-based lending. In this case, the lender will use your equipment as collateral for the loan. The lender will assess the value of the equipment and lend you a percentage of that value. You will then make regular payments to repay the loan over time.
What are the benefits of asset-based lending?
Asset-based lending can offer several benefits for your business. Here are some of the advantages of using asset-based financing:
- It can provide quick access to funding
One of the main benefits of asset-based lending is that it can provide quick access to funding. Lenders are often more willing to lend to businesses that may not qualify for traditional bank loans because the loan is secured by your assets. This arrangement benefits your business, especially if you need funding quickly to pay your bills, invest in a new machine, or take advantage of a growth opportunity.
- It can help improve cash flow
Asset-based lending can also help improve your cash flow. If you’re waiting for customers to pay their invoices, you may experience cash flow problems. By using accounts receivable financing, you can access the funds you need to keep your business running while you wait for your customers to pay.
- It can be more flexible than traditional financing
Asset-based lending can be more flexible than traditional financing. Since the loan is secured by your assets, lenders may be more willing to work with you on the terms of the loan. This can include the interest rate, repayment period, and other terms.
- It can help you grow your business
Asset-based lending can also help you grow your business. By accessing funding through asset-based financing, you can invest in new equipment, hire additional staff, or expand your product line. This can help you take advantage of new opportunities and grow your business over time.