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Asset Based Lending: What You Need to Know

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Finding business financing can be difficult, especially if lenders see you as a risky borrower. You could have trouble qualifying for a loan if you have poor credit, cash flow problems or other flaws in your financial history.

However, your business assets could provide some reprieve. Asset-based lending allows business owners to offer collateral to qualify for financing. Assets like equipment and inventory would secure a loan and give you access to the money your business needs.

If you have substantial business assets you could use as collateral on a loan, we’ll help you better understand how asset-based lending works and how you could benefit from this financing option.

What is asset-based lending?

When obtaining an asset-based loan, you would be required to offer one or more assets as collateral to secure the financing. This means the lender could seize those assets if you don’t make payments or fail to meet other obligations of your loan agreement.

Asset-based lending is different from factoring because you would borrow against your assets rather than selling them to the lender in exchange for funding. To fund an asset-based loan, the lender would advance you a percentage of the total value of the collateral that you’ve offered.

Interest rates can be high on asset-based loans, and you may have to pay fees for the lender to conduct occasional audits to monitor your business. However, these loans are typically less expensive than unsecured loans or merchant cash advances, which don’t require any collateral to qualify.

Lenders accept collateral that can be converted into cash in case your business defaults on payments. You would receive a percentage of the value of those assets in the form of a loan. Here are a few common assets you could use to secure a business loan:

  • Equipment: Valuable equipment you use to operate your business.
  • Inventory: In-stock inventory that is ready to be sold.
  • Accounts receivable: Outstanding invoices waiting to be paid.
  • Property: Any real estate or vehicles used for business.
  • Investments: Stocks, bonds or mutual funds that your company has.

Depending on the worth of your collateral, you could receive 50% to 90% of the value in the form of an asset-based loan. Accounts receivable typically yields the highest percentage, potentially up to 90%, while you could receive about 75% of the value of equipment and 50% of inventory.

How to apply for an asset-based loan

You could find asset-backed financing from traditional banks and online business lenders. Online lenders usually have simpler applications and faster time to funding than banks, though they often charge higher interest rates as well as fees.

When applying, you would offer either hard assets or paper assets as collateral. Property, such as real estate or vehicles, would be considered a hard asset, while stock, investments or bonds would count as paper assets.

In addition to collateral, a lender would likely consider the following information about you and your business:

  • Personal credit history: Your credit score would carry more weight if you have little business history to show.
  • Business plan: A lender would likely want to see your business plan to understand how you will repay your loan.
  • Balance sheet: Your assets and liabilities would show whether or not you’ve over-extended your finances. Your cash flow projections could be required as well.
  • Revenue: The amount of money coming into the business would affect your eligibility for financing.
  • Type of business: Lenders consider some businesses riskier than others.

Lenders would gather this information from various documents, which could include:

  • Last three months of bank statements.
  • Income tax returns from the past two or three years.
  • Legal contracts, such as partnership agreements or contracts with suppliers or franchisors.
  • Profit and loss statements.
  • Proof of business ownership, like a current business license or articles of incorporation.

The information you provide would give the lender an idea of your risk as a borrower. That risk, as well as the type of collateral you offer and the size of the loan, would determine the cost of your asset-based loan. Interest rates could range from 7% to 17%, depending on those factors.

Is asset-based lending right for your business?

When considering asset-based lending, first determine if you have available collateral that could secure financing, such as equipment, inventory or accounts receivable.

Business owners who have less-than-perfect credit can benefit from an asset-backed loan, as the collateral would reduce the risk for the lender. That would give you a better chance of being approved, making asset-based loans relatively easier to obtain than other types of funding.

You generally wouldn’t be restricted in how you use your loan and could cover various expenses — to expand your business, purchase materials or pay employees or suppliers, for instance.

Asset-based lending is typically suitable for small and mid-sized companies that generate stable revenue and have assets available to finance. Large companies could also choose asset-based loans because of the lower cost over time compared to unsecured financing.

However, some lenders have strict qualification requirements and only accept certain assets. Lenders could also assign a value to your asset that’s below market value, reducing the amount you could borrow. An asset-based loan could end up being more expensive than other kinds of financing after adding audit and appraisal fees.

An asset-based loan could have a negative effect on your credit score, as it may send a signal to credit bureaus that your business’s financial position isn’t strong enough to secure a loan without offering collateral. And if you can’t keep up with payments, you risk losing your collateral altogether.

As with any financing, be sure to shop around before settling on a lender. Look for interest rates and repayment terms that work best for your company. You risk losing the rights to your assets if you fail to meet the requirements of your loan agreement for asset-based lending, so be sure to read the fine print to understand what’s expected of you as a borrower.

 

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