Asset-based lending is a financing method that allows businesses to borrow money by using their assets as collateral for a loan. This type of lending is beneficial for companies that may not qualify for traditional cash-flow loans but have substantial assets to leverage. Assets that can be used as collateral include vehicles, machinery, equipment, inventory, accounts receivable, and other business-related assets owned by the company.
How asset-based lending works
If a business lacks the cash flow to meet the monthly payments of a loan, a lender may still provide funding if adequate collateral is pledged. The lender will evaluate the collateral and determine the loan amount based on the value of the assets. Liquid assets, which can be easily converted to cash, are typically more favorable to lenders.
Step 1: Borrower applies for an asset-based loan
Businesses can apply for specific asset-based lending programs or enhance their loan applications by pledging collateral.
Step 2: Lender reviews application & the selected collateral
The lender assesses the collateral and may require additional documentation, such as purchase agreements or financial statements.
Step 3: Lenders evaluate value of assets being pledged for the loan
An appraisal is conducted to determine the value and condition of the collateral.
Step 4: Loan offer is issued to borrower for review and acceptance
Once the collateral is evaluated, the lender presents the loan terms, which the borrower can accept or negotiate.
Step 5: Final paperwork & applicable liens are filed
The borrower signs the final paperwork to formalize the loan, and the lender may file a UCC lien against the collateral.
Examples of asset-based lending
– Non-liquid asset: Real estate has a lower advance rate due to the time required for sale.
– Liquid asset: Inventory and accounts receivable have higher advance rates due to their quick conversion to cash.
Who should consider asset-based lending
Businesses with substantial assets, those unable to secure other loans, seeking competitive rates, expecting high ROI, and willing to risk asset loss in default should consider asset-based lending.
Where can I find asset-based lending
Asset-based lending is available through credit unions, business loan brokers, banks, and online lenders. Working with a reputable broker like Lendio can help match businesses with suitable financing options.
Asset-based vs cash-flow lending
Cash-flow lending is traditional, while asset-based lending focuses on collateral value.
Bottom line
Asset-based lending can provide funding for businesses with assets to leverage, even with poor credit. However, it’s essential to weigh the risks of potential asset loss in default.