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Asset-based financing explained

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How you can use your inventory, accounts receivables and more to secure a loan for your business.

If you’re business needs a funds, qualifying for a loan could be difficult if your business has bad credit, poor cash flow or isn’t profitable yet. Backing a loan with your business’s assets can make it easier to get approved by taking some of the risk off the lender. It can take months to get financing, however, so it’s not the best option for emergencies.
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  • Must have been in business for at least 3 months
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    What is asset-based lending?

    Asset-based lending is a type of business financing backed by anything with a cash value in your business’s name — in other words, its assets. This means that if your business can’t pay back the loan, your lender can take and sell these assets to make up for the loss. Typically business owners use asset-based lending for working capital or to fund new projects.

    Asset-based loans are riskier for the borrower — your business stands to lose big if it folds. But if you’ve had trouble qualifying for traditional loans in the past, you may have an easier time getting access to funds with this type of financing.

    While it’s possible to get an asset-based term loan, lines of credit tend to be more common.

    How does asset-based lending work?

    Asset-based lending works a lot like a secured business loan or line of credit. How much you’re eligible to borrow — called the borrowing base or loan-to-value (LTV) ratio — depends on the value of your assets. Typically, your business can borrow between 75% and 85% of the total value of your assets.

    Your borrowing base often depends on the type of asset you’re using. For example, the LTV for loans backed by equipment or inventory can be 50% or lower since their values can decrease over time. Meanwhile, accounts receivables can get you an LTV as high as 90% because they’re fixed values that won’t change. With an asset-based line of credit, your lender regularly re-evaluates the value of your assets to adjust your borrowing base.

    Let’s look at an example: Say a business owns $10,000 of equipment and applied for an asset-based line of credit.

    It originally qualified for a credit limit of $5,000, a 50% LTV. But after the value of the equipment depreciated to $8,000, it could only qualify for a $4,000 credit limit with a loan backed by those assets alone.

    Compare business loan providers that offer asset-based lending

    Rates last updated October 22nd, 2018
    Unfortunately, none of the business loan providers currently offer loans for these criteria.
    Name Product Product Description Min Loan Amount Max. Loan Amount Requirements
    Interstate Capital Factoring
    Free up working capital with an advance on up to 100% of your unpaid invoices.
    $8,000
    100% of your unpaid invoices
    Business in good standing with no existing tax liens
    National Business Capital Business Loans
    Get a large business loan to cover your financing needs, no matter what the purpose is. Startups welcome with 680+ credit score.
    $10,000
    $5,000,000
    Your company must have been in business for at least 6 months and have an annual revenue of at least $180,000.
    Lendio Business Loan Marketplace
    Submit one simple application to potentially get offers from a network of over 75 legit business lenders.
    $500
    $5,000,000
    Must operate a business in the US or Canada, have a business bank account and have a personal credit score of 560+.
    LendingTree Business Loans
    Multiple business financing options in one place including: small business loans, lines of credit, SBA loans, equipment financing and more.
    Varies by lender and type of financing
    Varies by lender and type of financing
    Varies by lender, but you many require good personal credit, a minimum business age and minimum annual revenue.
    BizLoans.io Business Loan Marketplace
    Get connected with wide range of loan amounts and multiple loan types from reputable lenders.
    $20,000
    $500,000
    Must have good credit and at least 6 months in business.
    BlueVine Invoice Factoring
    BlueVine invoice factoring helps your business free up the cash trapped in your invoices through its simple and intuitive online process.
    $20,000
    $2,500,000
    Must be in business at least 3+ months, have a personal credit score of at least 530, and have a monthly revenue of $10,000 or more.
    Fundbox Business Financing
    Get flat rate, short-term financing based on the financial health of your business, not your credit score.
    $100
    $100,000
    You must have an established business with regular monthly revenue.

    Compare up to 4 providers

    What types of assets can my business use to back a loan?

    Almost anything your business owns that has a cash value. Some common assets include but aren’t limited to:

    • Inventory
    • Accounts receivables
    • Equipment
    • Machinery
    • Real estate
    • Vehicles

    How is asset-based lending different from a secured business loan?

    While asset-based lending and secured business loans are similar, they differ by how lenders determine your loan amount. Asset-based lending determines loan amounts based on the value of what your business owns, such as accounts receivables or real estate.

    Secured business loans are typically backed by one specific asset like a piece of equipment or vehicle stated in the terms. Often, businesses use the funds from a secured business loan to purchase the asset it’s using as collateral. For example, if a restaurant took out an equipment loan to buy an industrial dough mixer, it’d use the dough mixer as collateral for the loan.

    Asset-based financing vs. factoring

    The fundamental difference between asset-based lending and factoring is how it works. With asset-based financing, your business takes out a loan based on the value of items it owns. With factoring, your business sells one of its assets — its unpaid invoices — to a third party.

    With asset-based financing, you pay off your loan plus interest and fees in regular installments over a set period of time. Factoring is typically a two-part deal: You get part of the funds upfront and the remaining value of your invoices after your clients pay up — less a fee.

    Asset-based financing is generally a better option for more established businesses. Many asset-based loans start with a borrowing base of around $700,000, while factoring typically has a much lower minimum — if any at all.

    How much does it cost?

    Asset-based loans can be less expensive than your average term loan. Typically, the APRs on asset-based loans range from 7% to 17% — though they’ll vary depending on your specific situation.

    On top of interest, you might have to pay to have your assets evaluated. How much you’ll fork over for an appraisal depends on the type of asset. Accounts receivables are typically easiest to assess, while inventory, machinery and real estate might require a site visit.

    Can my business qualify?

    Whether or not your business qualifies for an asset-based loan generally depends on your business’s assets more than anything else. Typically, your assets must:

    • Not be used as collateral for another loan. If your assets are already being used as collateral, then you’ll need to get your lender to agree to take the collateral off the loan.
    • Not be tied up in any accounting, tax or legal issues. This includes tax liens and lawsuits that could affect your business’s ownership of the assets.
    • Meet the lender’s minimum borrowing requirements. Typically, lenders require businesses to have assets with a borrowing base of at least $700,000. This means that between 75% and 85% of your assets’ value must be at least $700,000.

    How to apply for an asset-based loan

    One of the drawbacks of asset-based lending is that the application process is much more involved than your standard online loan. There are a few reasons for that. Asset-based lines of credit typically involve long-term relationships between the lender and the business, so lenders often want to make sure that they’re dealing with a trusted partner. Also, getting an accurate evaluation of your business assets’ worth can take some time and work.

    Typically, you’ll follow these steps:

    Advantages and disadvantages of an asset-based business loan

    Advantages

    • Competitive rates. Loans backed by collateral typically have more competitive rates than unsecured business loans.
    • Seasonality doesn’t matter. Manufacturers, distributors and other businesses that have seasonal drops in cash flow could particularly benefit from asset-based lending.
    • Your credit doesn’t count. Even if your lender checks your credit score, it typically won’t hold as much weight as it would with unsecured financing.

    Disadvantages

    • More fees than other types of financing. You’ll likely need to cover the cost of the due diligence process, which can get pricy depending on how long it takes.
    • Not for new businesses. While time in business might not be as important for asset-based lenders, it’s easier for established businesses to meet the minimum borrowing base requirements and show its business financials are strong enough to qualify for a loan.
    • Long turnaround time. Applying for asset-based financing can take months, so it’s not ideal for an emergency cost.

    Bottom line

    Asset-based loans could be a good long-term financing solution for established businesses that have trouble qualifying for unsecured business loans due to gaps in cash flow or bad credit. It’s not great when you need quick or small-dollar funding, and you could have trouble qualifying if your business is just getting off the ground.

    Interested in learning more about your business loan options? Visit our guide to compare lenders and find out how different types of financing work.

    Frequently asked questions

    Picture: Shutterstock

    Anna Serio

    Anna Serio is a staff writer untangling everything you need to know about personal loans, including student, car and business loans. She spent five years living in Beirut, where she was a news editor for The Daily Star and hung out with a lot of cats. She loves to eat, travel and save money.

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