Asset-based financing explained

First, get an idea of where your business stands financially to help you decide if an asset-based loan is the right fit. To do so, take a look at the most up-to-date versions of the following documents — your lender will likely ask to see them anyway.

• Balance sheets.This is where you’ll get a preliminary idea of what your business’s assets are and if they have enough value to qualify for a loan.
• Profit and loss (P&L) statements.A year-to-date profit and loss statement gives you an idea of your business’s current cash flow, and your previous year’s annual P&L statement helps you determine seasonal trends.
• Tax returns.Look at the past three years of your business’s tax returns to grasp how your business handles revenue. If your company is relatively young, include your personal tax returns.
• Business bank statements.Business bank statements are one of the most common ways for lenders to assess day-to-day profits and losses. Review at least four months of your business bank statements — or a year if you have seasonal sales.
• Sales forecast.Asset-based lenders often give as much weight to your business’s future sales as its sales history — if not more. Have a firm grasp of where your business is heading before you start looking for an asset-based loan.

After reviewing your business’s balance sheets, identify the assets that your business could use as collateral and take a closer look at what you’re working with. Start by reviewing some or all of the following documents.

• Accounts receivables aging statement.Accounts receivables are the most common type of collateral used for an asset-based loan. An aging statement shows the value of your invoices, when they’re due and any overdue stragglers.
• List of equipment.If you don’t have an updated list of your company’s equipment, make one. Includes in-store fixtures and appliances — like your cash register — as well as heavy machinery and vehicles. For each item, list the price you bought it for, whether you got it used or new, how old it is, where it’s located and its condition.
• List of inventory.Review or create an up-to-date list of your business’s inventory and its estimated value for resale — the amount your lender could sell it for, not the retail value. Also make a note of where it’s stored.

Bonus points if you can estimate the current value of your equipment by looking into depreciation values or getting it appraised — you can do this online for free with vehicles and some other items.

Now that you know what assets you can use to back your loan, make sure that they aren’t tied up in anything else. If your business is facing a lawsuit that could affect its assets, hold off on applying until after the suit is over. And settle any unpaid taxes if your business has a tax lien on its assets.

While you might be able to qualify for an asset-based loan even if you’re using some of your assets as collateral for another loan, you’ll likely have a better chance of getting approved if you close those debts first.

Once you have an idea of what you’re working with, start comparing lenders that offer asset-based financing. Ask yourself the following questions to make sure you find the right loan for your business:

• Is my business eligible?This typically falls on the value of your business’s assets. If the lender doesn’t mention a borrowing base minimum online, call and ask if it has one.
• What are the rates?Since asset-based loans are less risky for the lender than unsecured loans, you can typically find lower rates between 7% and 17% APR. Comparing APRs on lines of credit is the easiest way to tell which will cost your business less in the long run. If you’re comparing loans, make sure they have similar terms.
• What are the fees?If the lender doesn’t mention fees, reach out and ask what you can expect to pay up front.

Once you’ve found a lender that works for your business, complete and submit the application. Many allow you to do this online, though some banks and credit unions might ask you to visit them in person.

You might be required to submit a few preliminary documents like bank statements along with your application. Some lenders could require a financial audit by a third party. Reach out to your lender if any part of the application is unclear.

It can take up to a month for your lender to review your application.

The due diligence process convinces your lender that your assets are worth what you say. Here, your lender calculates your business assets’ value, checks that they aren’t being used as collateral for anything else and inspects your accounting book.

This typically includes a field audit, where a lender representative visits your business to check out your office space, review your account receivables and financials and inspect any equipment or machinery offered for collateral. Since asset-based loans are typically long-term financial commitments, your lender typically uses this visit to determine if the two of you can sustain a long-term relationship.

Generally, you’ll have an idea if you’re approved by the end of the field audit. But you won’t know for sure until your lender fully assesses your assets and application and gives you a final offer.

Review, sign and submit your loan documents once you get the green light from your lender and wait for your business to receive its funds.

Not for a business that’s paying it back. In this case, it’s considered a liability. Loans are only assets for the lender, since it’s money it stands to collect.

Yes. In fact, an asset-based line of credit can help your business cover working capital costs while its funds are tied up in the transition. And once the merger is complete, you can use your business’s new assets to increase the credit limit.

Yes. Some lenders specifically offer asset-based lending options for healthcare companies and hospitals.