Using Asset-Based Lending for Fast Growth
If your small business is growing faster than expected, you may need more capital than you realized to purchase new inventory, hire more employees or expand your company. If this happens to you, consider asset-based lending to get cash and grow your company.
What Is It?
Asset-based lending is the process of taking out a loan using your inventory or accounts receivables as collateral. You get money now and pay it back out of future revenue. The lender checks out your assets and then offers you a percentage based on their value. Typically, this percentage is 70 percent to 80 percent if you’ll pay it back through receivables and about half if you intend to pay it back via finished inventory.
What Are the Advantages?
Asset-based loans allow companies to grow more quickly or to get over a financial hump without losing momentum in their operations. These types of loans are best for distributors, manufacturers and service companies that have seasonal industry cycles. Asset loans are also beneficial for finance acquisitions.
What Are the Disadvantages?
Asset-based lending does have some disadvantages. If your company doesn’t have quality receivables, you won’t be able to secure a loan. Lenders look at your clients to determine which ones pay on time and have a strong credit rating and they may overlook individuals and other small businesses. Additionally, asset-based loans have varying interest rates that are typically higher than traditional loans. Finally, a third party controls your company’s cash flow, meaning your customers pay them instead of you.
How Do You Get Started?
In addition to traditional banks, many independent finance companies offer asset-based loans. If you run a small business, search for lenders that are willing to work with new companies. Unfortunately, because most lenders would prefer to make larger loans, this can be tricky. However, as long as you are willing to do your research, you can still find a lender as long as your company has common inventory, good financial statements and customers who pay their bills on time. When applying for an asset-based loan, ensure your financial information is not only accurate, but detailed. You want potential lenders to see how viable your company is long-term. Have a professional prepare your financial statements to better your chances.
Although asset-based lending is not for every company, it can be beneficial if your business is in a bit of a bind. Research possible lenders to determine interest rates, fees and their reputation with other borrowers before signing on the dotted line.