Guide to Asset Based Lending:
- What Is Asset Based Lending?
- How Does Asset Based Lending Work?
- Types of Assets You Can Use as Collateral
- The Advantages of Asset Based Financing
- ABL: Banks Vs. Marketplaces
- Qualifying for Asset Based Lending
- How to Use Asset Based Loans
- Examples: How Industries Use Asset Based Lending as a Financing Tool
What Is Asset Based Lending?Asset based lending is a type of business financing in which the lender secures the agreement with an asset or collateral. Asset based lending can give the borrower either a loan or line of credit. Collateral for asset based lending doesn’t need to be real estate. Other more liquid assets, like receivables, inventory, purchase orders, and potentially equipment can also act as collateral. You can leverage one or more of these assets to secure a loan or an ongoing credit facility/line of credit for your business. Unlike other financing options, your business can qualify for asset based financing with a low credit score or no history. Rather than meeting traditional requirements, you can qualify based on your receivables, inventory, or other assets. Asset based lines of credit and loans help you capitalize on the value of your liquid assets right away. Instead of waiting for payments, you can get working capital to cover expenses like growth, expansion, additional inventory purchases, and more.
How Does Asset Based Lending Work?Asset based lending works like most other business financing options—you get cash to drive your business growth and pay it back over time. Asset based lending, however, involves putting up an asset (which will be explained below) as collateral. You can choose to put up real estate, but there are many other options that may be simpler, easier, and less risky. It’s not uncommon for new and older businesses to experience cash flow issues due to rapid growth or slow-paying customers. In these situations, asset based lending helps you unlock instant cash to use immediately by leveraging assets like receivables, inventory, and more. Many businesses utilize asset based lending for standard working capital needs or shortages, during seasonal slow periods, and to cover slow-paying receivables. When you put an asset up as collateral, you’re reducing the lender’s risk and giving them confidence because they’re given a security interest in the asset. As a result, this may reduce your interest rate. However, interest rates can vary based on a number of factors. While there are a number of types of collateral, lenders tend to prefer highly liquid assets like receivables to illiquid options like equipment. Nonetheless, you can still find great options by putting up your equipment as collateral. Revolving asset based credit lines allow you to continuously draw additional capital as you need it.
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Types of Assets You Can Use as CollateralAsset based lending relies on collateral, but that doesn’t mean you need physical collateral like land or real estate. In fact, there are several types of collateral you can utilize to secure term loans or lines of credit and raise the borrowing base. However, keep in mind that lenders will find some types of assets more valuable than others. Lenders tend to prefer assets with more liquidity because they provide added security with minimal risk. Nonetheless, you can generally utilize illiquid assets like land and real estate, especially if you’re looking to add security with other assets in the mix.
Accounts Receivable or InvoicesUtilize unpaid invoices from late-paying customers to unlock new cash and invest in the future of your business.
InventoryPut up unsold inventory as collateral. While your inventory may be valued at wholesale, rather than market rates, you can still gain significant leverage.
Purchase OrdersInstead of turning down future sales due to working capital shortages, sell future sales to receive cash for materials and capitalize on your opportunities.
EquipmentSecure your financing with a hard asset, like collateral. The easier a lender can resell the equipment on the secondary market, the better your equipment will function as collateral.
Real EstateReal estate can add extra security for hard money lenders, but is best used in asset based lending when coupled with more liquid assets. It’s a great form of secondary collateral that you can use to qualify for additional financing, when receivables don’t cover exactly what you need.
The Advantages of Asset Based FinancingIn today’s business lending environment, there are plenty of options that you can qualify for without putting assets up as collateral. However, putting up assets as collateral may prove beneficial if you’re in need of cash. There are a number of reasons that your growing business should consider this underutilized financing option:
- Without putting up real estate, you can get cash to grow your business
- Asset based loans and revolving lines of credit are fast and simple to obtain
- You can qualify as a young or new business owner, as long as you have the required assets
- Assets lower the lender’s risk, which generally means you can qualify for lower interest rates
- Utilizing an asset unlocks your ability to borrow more and qualify for higher funding amounts
- As long as you can prove your ownership of the asset, you can receive fast approvals and immediately boost cash flow
ABL: Banks Vs. MarketplacesWhere should you apply for an asset based loan? There are a few factors you should consider to make the best choice for your small business. Banks boast lower interest rates, but require a lengthy application and turnaround time. They also hold applicants to higher credit score and sales expectations. You may qualify, but you’ll only be able to consider one option, which may not meet your needs. The wrong asset based loan could subject your business to years of repaying a loan that ultimately won’t help your business. Marketplaces, on the other hand, simplify the application process and normally have access to numerous lenders and finance companies. Many are asset based lenders with a unique focus on certain industries and collateral types. The best marketplaces ensure that it’s easy to match you with all relevant options so that you can select the best for you.
Qualifying for Asset Based LendingWondering how you can qualify for asset based lending? The process can be easy, but it depends where you go. Banks have a long turnaround time and a complicated process, even while your asset will lower their risk. While rates may be slightly lower, you’ll pay for this in extended review processes and potentially lower financing amounts. If you’re not concerned about your opportunity fading away or your competition catching up, though, then this may be a good option. Marketplaces, on the other hand, have a simpler and easier qualification process that ensures you can review more options faster. At National, all you need to qualify for asset based lending is:
Applying for a Business Line of Credit
Applying for a line of credit is easy, and simply learning your options won’t affect your credit score. Here’s how it works:
Fill out our simple 60-second application to begin the process. Then, complete your online application by connecting your bank statements through our bank-grade portal in under 3 minutes.
Consider multiple loan options available within our marketplace. Hear your options explained by a knowledgeable Business Financing Advisor, and ask any questions you have.
Select the best option available and get funded in as little as a few hours. Start using your cash to grow your business right away, without restrictions on how you can use the funds.
How to Use Asset Based LoansWhen it comes to fast cash for urgent working capital needs, asset based lending is a simple, fast and easy option. Generally, there are no restrictions on how you can spend these funds.
- Fuel Business Growth: Take the next steps in growing and expanding your business by opening a new location, expanding offerings, and more
- Fund Inventory Purchases: Obtain inventory in bulk quantities to lower costs and drive profits, especially during peak periods
- Fill New Orders: Invest in growth by purchasing the materials you need to fill incoming orders, despite high upfront costs
- Cover Expenses: Stay on top of rising operating costs like rent, insurance and more with an asset based loan or credit line
- Keep Extra Cash on Hand: Never miss a new, revenue-generating opportunity again with extra cash in your back pocket
- Endure Slow Seasons: Cover expenses like payroll, operating costs, and marketing during slow seasons when revenue is down
Examples: How Industries Use Asset Based Lending as a Financing ToolAsset based lending offers a viable way to grow your business fast, instead of waiting around for working capital to catch up with your needs. From a very early point, small, medium, and large businesses can all utilize asset based lending to grow. Here are a few examples of how companies in certain industries have already grown with ABL:
- eCommerce: As demand increases, eCommerce companies can use asset based financing to buy more inventory, increase marketing, and land new customers.
- Marketing & technology: With more clients on the books, marketing and technology companies can sell agreements to tap into additional cash and fuel growth.
- Textile & shoe: Fast-growing textile and shoe companies frequently use ABL to purchase supplies and inventory ahead of bulk transactions.
- Wholesale: ABL ensures wholesalers have the cash they need for high-ticket transactions that yield substantial returns, especially while getting things off the ground.
- Gas & Oil: While gas and oil sales have sky-high profit margins on the distribution side, purchasing supply can be a cost challenge—which is where asset based loans often help.
- Medical Supply: Distributors, especially those selling PPE, tend to utilize asset based lending in order to place bulk orders for inventory at the lowest, most cost-effective rate.
10 Reasons Why National Business Capital Offers the Best Asset Based Lending
|Paperwork||– 2-3 Years Tax Return – 2-3 years Financials||– 3-6 Months Bank Statements – 1 Year Tax Return – 1 year Financials||– 3 Months Bank Statements – No Tax Returns Required|
|Application||– Lengthy – Paper Intensive||Multi-page Paper Application||– One page – One Minute – DocuSign®|
|Number of Lenders||1||1||75+|
|Service Level||Processor||Programmatic||Personal Advisor|
|Speed to Funding||Months||Days/Weeks||Hours/Days|
|Collateral Requirements||Always||Sometimes Required||Not Necessary|
|Business Profitability||Last 2 Years||Sometimes Required||Not Necessary|
|Credit Score||680+FICO||600+FICO||No Minimum FICO|
|Credit Check||Hard Pull||Hard Pull||Soft Pull|