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What Are Asset Based Loans and How Do Businesses Qualify?

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A startling 82% of business failure emanates from cash flow problems.

Having adequate capital to start your business isn’t enough. Before your business picks, you might need to invest in more money to keep it running.

Loans can be a great option when you need to expand your business. However, most traditional business loans are limiting. If you don’t have a robust credit score and proof of steady revenue, chances of qualifying for these loans are minimal.

Fortunately, you can apply for an asset-based loan. Keep reading to know more about asset based loans and how your business can qualify.

What are Asset Based Loans?

Asset based loans are a financing option where one uses the company’s assets as collateral when getting a loan.

The tangible assets that you use as collateral should be easily liquidated. The typical collateral includes equipment, inventory, and account receivables.

Contrary to traditional lending, your credit and the company’s financial history do not determine your eligibility. Instead, lenders focus on your business’s assets and value. If you default, a lender can use your assets to recover the money.

The specific nature of asset based financing makes the process of loan application slightly different from other loans. Unlike other loans, asset based funding has fewer restrictions, meaning that you can use the money in whatever project you deem right.

How Does Asset Based Financing Work?

Lenders determine your borrowing base, depending on the market value of your business assets. Typically, a business can borrow up to 50% of the total value of the equipment of inventory or up to 85% of the accounts receivables’ value.

Besides determining the borrowing base, tangible collateral acts as the security. Lenders can rest easy knowing that they can’t lose money regardless of the direction your business takes. A lender can seize your assets any time if you’re unable to pay back the loan within the stipulated time.

Theoretically, the acceptable collateral is a valuable asset, which can be liquidated into cash to allow the lender to recover money in case you default. During the process of underwriting, the lender determines your assets’ value to know the ideal collateral.

Most of the asset based loans are structured over three years or less.

Most of these lenders seek to provide transitional credit services, which makes the relationship with a company shorter than most other lending facilities. However, capital-intensive businesses can also benefit from an asset based loan.

Why You Need to Consider Asset Based Borrowing

As long as your balance sheets have assets, you qualify for asset based financing. A strong collateral pool will make you attractive for asset based loans. Whether you’re in retail, service industry, or manufacturing, asset-based borrowing can propel your business significantly.

Here are some of the reasons why you need asset based borrowing.

1. Your Business Is Scaling Up

In essence, upstarts grow gradually, which gives entrepreneurs time to have a financial plan.

In case your business picks up unexpectedly, keeping up with the growing demand might be challenging. You’ll need cash to reinvest in your business and expand.

If you don’t qualify for a bank loan, it’s not the end of your business. Asset based lenders can give you a loan based on promising business success. With commendable cash flows and sales projections, you’re likely to get a loan.

2. You Have a Poor Credit Score

The lowest possible credit score is 300, while the 750 to 850 score is considered excellent. A credit score measures your financial health. Most lenders examine your credit score to determine your capability of repaying a loan.

Asset based lenders overlook your business or personal credit score. Valuable collateral is the only thing you need. If you have poor credit, but your company has assets, you can get a loan without undergoing rigorous screening.

3. Flexible Financing Options

The flexibility of asset based funding is incomparable to conventional lending.

These loans take the form of credit lines, making them ideal for businesses with cash flow hurdles. The approach ensures that you only take the money you need, and the interest is only on the cash drawn.

More importantly, you can use asset based funds in different areas. Other than expanding your company, you can use the loan to buy another business or even refinancing a line of credit.

4. Take Advantage of Your Valuable Assets

Whether it’s a fleet of cars or a commercial building, valuable assets should enable you to start or expand your business. Using the assets as collateral will give you the working capital you require.

An asset based lender is probably the bridge between your current venture and your dream business. Utilize the investments that you already have to scale higher as an entrepreneur.

How to Apply for an Asset Based Loan

It would be best if you had a grasp of your financial position before applying for a loan. Some of the documents you ought to have in hand include the balance sheets, sale forecasts, profit and loss statements, banking statements, and tax return reports. However, lenders might not require all these documents to give you a loan.

Assets identification is one of the most crucial phases in asset based loan application.

Analyze the equipment and inventory list to know which items are valuable enough to act as collateral. The account receivable statements are also essential as it shows the past and outstanding invoices.

The lender then performs a Uniform Commercial Code search to know if your assets are free from any other creditor.

Once you’re cleared, you can complete the loan application and make the submissions as necessary. A lender will then ask you for preliminary commitment after reviewing your financials and application.

After a field audit of your business, the lender will determine if you’re a great fit for the loan. Even after the approval, the lender will be performing occasional audits to check if there are changes in the value of the collateral.

Assets Based Loans Are a Great Alternative When You Have Limited Cash Flow

Asset based loans are easier to get, unlike the traditional loans that have a variety of minimum qualifications.

With the number of asset based lenders available, you can’t miss an option that will work for your business. Get an asset based loan today and watch your business escalating.

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