Asset-based lending(or also known as asset-based loans) is a form of funding that uses business assets to secure the loan, instead of cash flow or credit. Traditional business loans often consider cash flow first before collateral. On the other hand, asset-based loans mainly rely on collateral. This allows rapidly growing businesses to maintain the liquidity they need to keep up with business expenses. To qualify, here are five types of collateral commonly used in asset-based lending.
1. Accounts Receivables (A/R) or Invoices
Accounts receivables – or the invoices you sent to your customers – are among the primary assets that can secure your asset-based loan. Generally, the size of your loan you qualify for depends on the value of your invoices. The greater the quantity and the quality of your invoices, the higher the amount of money you can borrow.
The loan-to-value (LTV) varies but the average rates are usually 90% of the total invoice value. Many factors affect the advance rate of your invoices: How long does it take before your customers pay up? What are the payment terms? How is the credit rating of your customers?
2. Commercial Real Estate
Commercial real estate pertains to any commercial space your business owns. These assets can be used to secure your asset-based loan. However, lenders may need to evaluate them first. If you’re looking to use commercial real estate as collateral, you may need to obtain an independent appraisal to check the market value of your property.
If you’re currently paying a mortgage, you need to make sure you’ve paid off a hefty portion before you can use the property for collateral. This is because lenders only consider the real equity of your commercial real estate. You cannot use the mortgaged value since your mortgage provides has the right to the property value in the event of business failure.
3. Machinery and Equipment
Equipment such as vehicles, commercial kitchen appliances, construction equipment, computer system, technology, and other equipment and machinery your business uses can serve as collateral for your loan. It works similar to an equipment loan or auto business loan.
Similar to accounts receivables, the higher the value of your equipment and machinery, the higher the amount of money you can borrow. However, keep in mind that your business needs to own the equipment before lenders can consider it for collateral. Remember, your business should be the equipment owner, not you.
If you operate within the wholesale or retail business, you most likely have a lot of product inventory. This inventory can be used as an asset on your valance and therefore, eligible as collateral for asset-based lending. Similar to real estate, lenders will appraise your inventory to figure out its resale value. Lenders will then determine if you can use your inventory as collateral.
You don’t have to surrender your inventory to your lender. The inventory is still yours to sell or keep, as long as you repay the loan within the agreed period. However, in the event of a default, lenders have the right to repossess your inventory (or other inventory similar to value) to repay your debt.
5. Other Business Assets
Aside from accounts receivables, real estate, inventory, and equipment, there are other types of collateral lenders accept like purchase orders, marketable securities, and intellectual property to name a few. It depends on the lender you’re working with and the type of business you run. Be sure to ask your lender about it so you can leverage other assets to secure asset-based lending.
Asset-Based Lending for Small Businesses
If your business owns the assets mentioned above, you will most likely qualify for an asset-backed loan. Keep in mind that if you can liquidate it into cash, you can most likely put it up as collateral. But even though there’s a long list of collateral you can use, certain assets are more valued compared to others. Lower valued assets can be added to further strengthen your loan value.
SMB Compass offers asset-based lending to small businesses in the United States. With over 20 years of experience, we have funded and helped companies take their business to the next level.