3 Benefits of Asset Based Lending
If you are seeking means to fund work at a small business, it may be worth considering asset based lending. This form of lending is sometimes overlooked, but has unique benefits that may not be present with other types of loans. Consider the following three benefits in order to determine whether an asset based loan would help your business.
1. Collateral Is Most Important
An asset based loan works by lending against the value of an asset you put up as collateral, and the value of the given asset is the most important factor in the loan. The asset may be real estate, equipment, inventory, accounts receivable — or something else, with tangible appraised value.
Because the loan is essentially entirely determined by the value of collateral, you may be able to obtain financing in situations that would otherwise preclude access — for instance, if you have a less than ideal credit score, or limited business history.
Other typical necessities of applying for loans, like providing extensive financial and other documentation, may not be necessary under asset based lending. Likewise, the loan may be less restrictive about purpose, allowing you to use borrowed cash for whatever you choose.
2. Fast Access to Cash
Asset based loans have another widely-appreciated virtue: access to cash typically comes much more quickly than it would with a commercial term loan, or even a line of credit. Again, the asset in question determines and backs up the full amount of the loan. So long as sufficient documentation is provided, or an appraisal is done, to determine the given asset’s value, you can usually access funds fairly quickly.
3. Potentially Favorable Terms
Because risk in an asset based loan is mitigated by the value of collateral, many loans will typically offer more favorable interest rates than would other loans. However, this will be determined by distinct financial institutions; it’s useful to have a conversation with a financial professional, and potentially multiple lenders, to determine what is most sensible for your business.
In short, asset based lending can be an incredibly effective strategy to raise funds for small business purposes. This does not suggest that a loan should be taken lightly; in the event of a default, having an asset seized by your financial institution can be devastating for both personal and business reasons. But if done responsibly, taking out an asset based loan can be an effective way to access cash for widely varying business purposes.