Over the last few years, asset-based lending has become popular as more entrepreneurs continue exploring various business financing options. This form of financing is excellent for a company facing cash flow shortages due to growth. If you’re in this position and are considering this type of financing, the blogs below break down what it is.
What Is Asset-Based Financing?
This is a type of financing that lets you secure a loan with your assets used as collateral. Instead of the lender looking at how big or strong your company is, they look at how substantial your assets are to determine the loan to give you.
Advantages of This Type of Financing
Some of the reasons you should consider this type of financing include:
- It’s flexible
- Easier to obtain than other loan products
- Can help improve cash flow quickly
- Comes with fewer covenants compared to other loan products
- It’s a cheaper option compared to other solutions like factoring
While there are many reasons to get a business loan, understand that asset-based lending comes with several limitations. For instance, payment has to be handled through a lock box, and a sample of invoices has to be verified periodically.
How a Transaction Is Structured
Transactions are usually designed as a revolving line of credit. Your assets will determine the size of the line. The assets can include inventory, accounts receivable, property, machinery, etc. You can’t borrow 100% of the asset value. Instead, the lender places borrowing limits which can be between 80 to 85% of the inventory. Understand that the asset’s quality determines lending limits. Once the lender establishes a borrowing base, you can submit your financing requests and start receiving funds.
Here is How the Fees Are Structured
Asset-based loan fees are structured in two ways. These ways are the discount and service fee. The discount fee is charged depending on the gross value of the invoiced being financed and its one-time fee. A service fee is usually charged monthly against the utilized funds. When getting this type of loan, the lender will explain how these two fees are structured.
Are you considering asset-based lending for your company? Talk to Achieve Capital Advisors. We will educate you on how this financing works and help you secure a loan.