Asset-based lending is a practice in which banks and financial institutions offer companies loans based on asset collateral. Collateral can be any of the following – inventory, equipment, accounts receivable or other assets. Also known as commercial financing, it is in great demand by companies in need of funds.
Advantages offered by asset-based lending
Many companies are choosing this method over others as the advantages are many and qualifying for an asset-based loan is much easier.
The biggest benefit is that this type of loan offers customers a steady cash flow and stability. It is a great resource especially when a company is growing fast, doesn’t have enough cash on hand or gets revenues only seasonally.
Qualifying for an asset-based loan is very easy as the regulations are not as stringent. A business should have a good profit record and decent financial controls in place. If it meets these two requirements and has assets to pledge, getting a loan is easy.
Even though the loan process is easy, there are restrictions on how the money is spent. It must be used for the purpose stated in the paperwork. Accounts receivable notes from good clients make for good collateral as they can be encashed within six to eight weeks.
Companies which meet the loan criteria get their loans fast, within two weeks or so. If the company is in trouble but stable, the loan approval period could be longer.
Asset-based loans have fewer standards that must be met by applicants than traditional loans. They may also be offered for shorter periods, so complying with requirements is easier.
Companies usually require quick funding when they are in a growth phase. This type of loan helps the applicant to get the cash needed and prove their creditworthiness to the lender. Establishing a track record helps a company get more significant loans and other products after a few years.
Interest rates on these loans are lower than regular loans for a reason. Since the lender has collateral on hand, it can be sold if the payment is defaulted on. Lenders can recoup their funding.
Asset-based loans can be tricky as the lender gets cash from the customers. This option must be used only if one is sure that the loan can be paid promptly. In spite of the caveats attached to such loans, they are still the best source of funding for those in need of quick cash infusions.