If you find your business short on money for payroll, you might need a loan to cover that and other expenses in a cash-flow crunch. Asset-based lending might be the answer.
Asset-based lending is when a lender issues your business a loan or line of credit secured by some form of collateral. This could be your inventory, accounts receivable, real estate or another asset under the business.
The collateral you put up makes asset-based loans easier to get than other small business loan options, making them an ideal choice if your company’s credit is a bit shaky. Since you’re putting a piece of your business at risk, however, it could be lost if you default on the loan.
It’s important to note that asset-based loans are only for businesses, not individuals.
It’s fairly common for businesses to take out loans or seek lines of credit to cover cash flow demands. For instance, a company that’s short on money for payroll may seek a loan to cover payments until more cash comes in.
Traditional and online banks provide asset-based loans, also known as asset-based financing, and the loan offer is based on the type and value of your collateral. Most lenders prefer liquid assets like securities that they can easily turn into cash if you default on your loan.
Lenders will typically use the loan-to-value (LTV) ratio to determine the amount they’ll offer you. The LTV ratio is calculated by dividing the loan amount by the value of your asset.
For example, imagine you’re seeking a loan of $100,000, and you apply using securities (stock and bonds) as your collateral. The lender agrees to provide you with a loan or line of credit that’s 80% of the value of your securities. If your securities have a market value of $150,000, the lender may offer you a maximum loan of $120,000.
However, if you were to put up specialized equipment that has the same value but is harder to convert to cash as your collateral, the lender might offer you just 40% of its value. That would get you a maximum loan of $60,000, which is $40,000 below your needs.
Another bonus of liquid collateral is that it can also come with lower interest rates.
Asset-based lending or financing makes up an increasingly large portion of private credit — the current market of $5.2 trillion is expected to grow to $7.7 trillion by 2027. Its utilization is being driven by inflation, traditional lenders tightening qualifications due to high interest rates and bank volatility.
Even so, asset-based financing isn’t entirely without downsides. Here are some notable pros and cons:
Pros:
Cons:
While asset-based loans are easier to qualify for and can be used for almost any purpose, asset-based lending isn’t the best option for every business.
If you think your company could benefit from an asset-based loan, Barrington Commercial Capital can help. Contact us today to learn more and explore your options.
