Editor's choice: Fundbox lines of credit
- Loans up to $150,000
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Qualifying for a loan is often difficult if your business has bad credit, poor cash flow or isn’t currently profitable. But 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 still take months to get financing, however, so it’s not the best option for emergencies.
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 if your business defaults on the loan, your lender can make up for the loss by taking and selling the assets used to secure the loan.
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.
Typically business owners use asset-based lending for working capital or to fund new projects. While it’s possible to get an asset-based term loan, lines of credit tend to be more common.
Asset-based lending is a type of secured financing — 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 ratio 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 ratio as high as 90% because they’re fixed values that won’t change.
An asset-based loan requires a one-time check of the value of your business’s assets. With an asset-based line of credit, your lender regularly reevaluates the value of your assets to adjust your borrowing base and rates.
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 ratio. 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 lenders that will consider your business’s assets when you apply for a loan.
Almost anything your business owns that has a cash value can be used to back a loan. Some common assets used as collateral include:
An asset-based loan or line of credit is a type of secured financing. Asset-based lending determines loan amounts based on the value of what your business owns and is willing to offer as security, such as accounts receivables or real estate.
While a simple secured business loan is typically backed by one specific asset like a piece of equipment or vehicle stated in the terms, an asset-based loan would likely use several. Often, businesses use the funds from a simple 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.
The fundamental difference between asset-based lending and invoice 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 — minus a fee.
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.
Your business’s assets determine whether you qualify more than anything else. But cash flow and credit still play a role. Typically, your assets must:
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:
Determine whether an asset-based loan is right for your business by weighing the pros and cons.
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? Read our guide to compare lenders and find out how different types of financing work.
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