Read on to discover the pros, cons, and everything in between about asset-backed lending to determine whether it is right for you here.
It’s a tough time for small businesses. The Covid-19 pandemic forced measures that slashed revenue for foot-traffic-dependent businesses like restaurants. Now, many businesses are on the cusp of depleting aid from federal programs.
As business owners look for ways they can keep the doors open, they must consider new options for liquid cash flow. A possibility open for some businesses is asset-backed lending.
Like most loans, asset-based loans come with pros and cons. So, let’s jump in and look at whether asset-backed lending is right for you.
What Is Asset-Backed Lending?
Asset-based lending offers a fairly straightforward approach for you to get funding. Your business puts up some form of eligible collateral, such as:
- Accounts receivables
- Machinery or other equipment
The lender evaluates the collateral and then offers a credit line based on the value of an asset. The more liquid the asset, the better the terms you can expect.
Accounts receivables generally command the most value, which lenders offering anywhere from 70% to 80% of the face value. Inventory or machinery/equipment might only secure 50% of their value.
Never dealt with an asset-based lender before? You can see an example of one at Your FundingTree.
One key benefit of an asset-based loan is that the requirements often prove lower. The asset provides the insurance that the lender can recoup their loan if you don’t repay. That makes credit scores, current revenue, and business projections less important.
These loans can also help a business that’s short of liquid assets because of rapid growth. Sudden growth can soak up working capital in higher payroll, supplies, and overhead. They can also help you finance an acquisition.
For businesses facing a seasonal drop in business, asset-based loans can get you through the rough patch. This can help you avoid painful layoffs.
The biggest pitfall of this kind of loan is the interest rate, which typically runs high compared with a traditional loan. You end up paying more for the same amount of money. Asset-based loans can also cost you in extra fees.
The lender may disqualify some of your assets for inclusion as collateral. For example, they might decide some of your accounts receivables from sole proprietors pose too much of a risk.
The lender may also require that customers direct payments straight to the lender. Some businesses find that prospect difficult.
Deciding about Asset-Backed Lending
Deciding if asset-backed lending is the right choice for your business takes a serious analysis of your situation. First up, you must assess whether you possess enough assets to justify the process.
You must determine if the lack of liquid capital truly hampers your business. If it merely represents a temporary inconvenience, waiting it out can make sense. If not, dealing with the pitfalls can help you secure growth or keep the doors open.
Looking for more financial advice for your personal life or small business? Check out some of the other finance articles on this site.