Business loans can be a confusing business. There are so many different types of loans out there, but if you’re wondering ‘what is an asset-based loan’ then you’ve come to the right place. Here in this fully compact guide to asset-based lending, we’ll take you through all the ins and outs and different types of asset-based loans so that you can make an informed decision when going about getting yourself the funds you need to reach your business goals.
What is an asset-based loan?
Simply put, an asset-based loan is a business loan or line of credit that’s secured solely by a business’s assets, which in this case means collateral. This collateral could be in the form of inventory, balance sheets, equipment or even your accounts receivable. It’s a great option for businesses who can’t ensure that its cash flow will cover the loan. A lender will be able to approve the loan based on the overall value of the business’s assets, allowing owners to keep their business running.
You may have also heard of them being referred to as ‘commercial finance’ – this is one and the same thing. There are two main types of asset-based loans, for the majority of cases, an asset-based loan will come in the form of a line of credit, but they can also be term loans as well.
How does asset-based funding work?
So how does asset-based funding work exactly? To get your funds you’ll need to pledge your assets as collateral and understand that the terms and conditions will depend on the type and the value of the assets that you’ve put forward. As a general rule of thumb, the more liquid your assets are as in, the faster the asset can be converted to cash if needed, the higher your loan-to-value ratio will be.
Non-liquid assets cannot be quickly sold off for cash, so this would be something like real-estate or equipment. Non-liquid assets are, for this reason, least preferred by lenders at it provides them with less security than an asset that can easily be cashed in should one cease to pay back their loan.
When you apply for asset-based funding with Become, it will be in the form of a revolving line of credit whereby your unpaid invoices are used as collateral. This flexible financing method provides your business with a pre-approved limit that is always available as credit for 12 months (with the handy option to renew). The debt is repaid periodically and the available credit line will roughly correspond to the value of the invoices outstanding.
Risk of losing assets
Of course, there is always the risk of losing your assets. In the unfortunate event that your business failed to repay a loan, the lender has every right to seize the pledged asset as collateral to secure the line of credit. Despite asset-based loans coming with many positives (we’re coming to that), there is always a chance of losing your assets. Before you decide on whether this is the right option for you, make sure to weigh the positives with this possibility.
Why should you choose an asset-based loan?
When it comes to choosing an asset-based loan, the thought of losing your assets may be a little off-putting, but the truth is, even unsecured loans may need some form of collateral. There are many reasons why this may be a good option for your business….
- Credit score does not matter – we’re serious! Due to the lenders’ focus on the value of your assets, your creditworthiness can go out the window for all they care. This is a great option for those who need funds but don’t have the greatest credit score to back them up.
- It’s quick – you can get funds into your account in as little as 4-7 days.
- It’s a non-notification service – which means that your customers won’t have a clue that you have a funding arrangement.
- You need funds for your expanding business – working capital is often an issue for young growing companies. With an asset-based loan, lenders will be focusing on things like your sales and projections rather than your past revenue.
- The risk is less personal – many lenders will require that you sign a personal guarantee, or put up other forms of collateral such as your family home. With an asset-based loan, the focus is on your business, not your personal life.
- A flexible financing solution – businesses with cash flow issues can make great use of asset-based loans as you can essentially draw cash whenever you need it and only pay interest on your drawn funds (this is the case when it is a line of credit, as many asset-based loans are).
Who qualifies for an asset-based loan?
Although asset-based lending can seem like a risky option for the borrower, it makes for qualifying much easier for those in need of funds. A business putting its assets on the line means that the lender is shrouded by a great big security blanket should a business owner cease to pay them. The security provided by the collateral means that qualifying for an asset-based loan is much easier than unsecured (and other forms of) business loans.
Of course, you still need to qualify – so what are the qualifications needed to get your hands on an asset-based loan?
- No minimum credit score to qualify
- Business age of 2 years minimum
- Revenue will depend on the lender you go with but for some, it isn’t important at all (due to collateral)
How to apply for an asset-based loan
Now that you know what is asset-based financing, we’ll detail how to apply with Become. Unlike most asset-based loans, where the process can involve extensive paperwork and even in-person interviews – when you apply with Become, the entire process is online and you can receive your funds in as little as 4-7 days!
Here’s how to apply:
1. Fill out an online application form with Become, you’ll need:
- Upload 3 months of bank statements (securely link your business bank account)
- Profit loss statement
- Year to date balance sheet
- Current accounts receivable aging report
2. If you qualify, select your lender and accept
3. You should be able to receive your funds within 7 days (providing you have all the needed information!
4. Draw as you please
If you’re a small to medium sized business with an unstable cash flow and low credit score, this could be a great option for you to gain access to funds. If not, remember, there are still many different types of loans and funding methods out there so be sure to check out our guide to business lending to see if there are perhaps better options for you.