Asset-based lending is a form of business financing that’s secured by collateral. Collateral is any asset a business owns that is of value and can be used to ensure repayment.
Businesses can use real estate, accounts receivables, inventory, equipment, or even purchase orders to secure asset-based lending. You may even be able to combine multiple different assets together.
Asset-based lending can help small businesses access the financing they need to cover cash flow gaps and pursue growth opportunities. Asset-based financing can take the form of a business loan or line of credit. It’s an incredibly fast lending solution that can be particularly helpful for young businesses with little history or low credit scores.
We’ll go into all the ins and outs of asset-based lending to help you determine whether this financing solution is a good fit for your small business.
Which Assets Can You Use as Collateral?
Many business owners assume asset-based lenders will only accept real estate as a legitimate form of collateral. It’s true that real estate is a common type of collateral, but you have the freedom to use different types of business assets as well.
Asset-based financing is inherently flexible and almost any valuable asset your own can be used. You can also combine different assets and bundle them together to access a greater borrowing base.
Just know that liquidity is key when it comes to asset-based lending. Lenders want to know that it will be easy to exchange your resources for cash in the event you default on your payments.
Here are some of the most common types of collateral used to secure asset-based lending.
Accounts Receivables and Outstanding Invoices
Many businesses experience significant time lags between invoices and payments. This is especially true for players in the construction, manufacturing, and transportation industries. If your business has a large sum of cash tied up in unpaid invoices, you may be able to use them as collateral for asset-based lending.
Many retail shops, eCommerce stores, wholesale companies, and other product-based businesses will use their excess inventory to secure asset-based financing. Even though most lenders won’t grant you the full retail value, it’ll nonetheless improve your borrowing base.
Purchase orders promise sellers a certain amount of products at a set price. Many different businesses have been able to successfully put up their outstanding purchase orders as collateral for asset-based lending. This practice is especially common for retailers, distributors, and wholesalers.
Any expensive equipment your business owns can be used to secure asset-based financing. This includes heavy machinery, technology, or transportation vehicles. How new your model is and how much depreciation it has gone through will determine the amount of working capital you’ll be able to access.
Real estate tends to be expensive and holds value well over time, which may help you secure a large amount of funding. Still, some lenders might not prefer property because it isn’t easily liquidated.
Using real estate as collateral can also bring about significant risks. If you’re unable to make payments on your asset-based line of credit or loan, you’ll have to forfeit your property.
Understanding the Goal of Asset Based Lending
Simply put, the goal of asset-based lending is to help your business access additional working capital quickly. Through either an asset-based loan or line of credit, you’ll be able to cover cash flow gaps, invest in new equipment, pursue opportunities, hire more staff, fulfill additional orders, and much more.
Many small business owners will seek out asset-based lending during seasonal slow periods or if clients are late with payments. You can also use an asset-based line of credit as an emergency fund, drawing upon it when expenses come up and making payments only on what you borrow.
It’s generally easier to get approved for asset-based lending than it is for other financing solutions. This is especially true if your business is fairly new, doesn’t have a lot of history, or lacks excellent credit.
Lenders tend to view asset-based financing as low-risk, which simplifies the approval process and can get you the financing you need remarkably fast.
Asset Based Lending Amount: How Much Can You Qualify For?
The amount of working capital you’ll be able to access through asset-based lending will depend on the type of collateral you provide.
Assets that have greater value and more liquidity, such as accounts receivables or purchase orders, are seen as less risky in the eyes of lenders and can help you secure a larger funding amount.
Most asset-based lenders will be willing to grant you 50% to 95% of your collateral’s total value.
Your time in business and credit score won’t be a major focus on your asset-based lending application, but performing well in these areas can help you secure more favorable terms.
How Asset Based Financing Can Help Your Small Business
Asset-based financing is a great way for small businesses to get their hands on additional cash. It’s flexible, relatively easier to get approved for, and can significantly improve cash flow shortages and cover working capital needs.
Many young businesses that haven’t been able to qualify for other forms of financing may be able to use their accounts receivables, unpaid invoices, or inventory as collateral for an asset-based loan or line of credit.
Even more mature businesses with a solid history and credit report can benefit from asset-based financing. By putting up collateral, you’ll be seen as less risky to lenders. As a result, you’ll be more likely to secure a lower interest rate and better terms.
Explore Asset-Based Lending Solutions
Ready to learn more about asset-based lending? At National, we help small businesses secure financing based on their own individualized terms.
Our Business Financing Advisors can walk you through the asset-based lending process and provide insight into how much financing you could qualify for. You can also explore different business loans or lines of credit and select the best choice for your business.
The best part? You could receive financing in as fast as 24 hours after approval. Fill out the 60-second application to get started!