There are times in a business lifecycle that cash is not easy to come by. Fortunately, there are numerous types of lending arrangements to assist businesses in every stage to receive the infusion that they need to grow. Asset-based lending is when an asset is used to secure a loan, and it is very useful in specific situations.
For businesses that have fixed assets but little cash flow, this type of loan makes use of what the company already owns to bring in much-needed liquidity. Busineses that are growing quickly are an example of the type of business that can benefit from this type of financing. Small businesses are another example. Businesses that have less than desirable credit are also prime candidates for asset-based loans. In addition, it is very common to see individuals engage in this type of financing to obtain short-term cash in exchange for material assets that they don’t currently need or use.
For all of these situations, utilizing assets as leverage for financing has a number of tangible benefits.
A company that has fixed assets on their balance sheet such as inventory, accounts receivable, securities, or property, plant and equipment (also known as PPE), can put those assets to work as leverage to secure additional capital. A business must weigh whether the assets are expendable in case the loan is defaulted on, but if the cash infusion is more important, then it is wise to use those assets to obtain it.
Relatively Easy to Obtain
It is easier for a business to obtain an asset-based loan than other type of financing because the lender uses the asset as collateral to secure the loan, making it a relatively low-risk arrangement for the lender. For new businesses or businesses with low credit ratings, this type of financing is often a life-saver.
Asset-based lending programs offer a great deal of flexibility as opposed to other loans. The funds can be used virtually any way the borrower chooses, as long as it’s related to the business. Because the funding is tied to the business’s assets, as their value grows the funding can be increased, which may be an additional benefit to the borrower.
Comparatively Low Cost
Because of the low-risk associated with loans that are secured by business assets, lenders are able to offer them at a discount. While these loans are financed using an annual percentage rate, they are often offered at a full percentage point lower than similar financing alternatives that are considered to be higher risk.