Asset-based lending, also known as asset-based financing, is a type of business loan or line of credit that companies secure with collateral. With traditional loans, lenders often place an emphasis on a company’s creditworthiness and cash flow when determining whether to approve applications for business funding. Yet with asset-based lending, the value of the collateral that backs the financing plays a more meaningful role in your business’ ability to get funded and its borrowing capacity. How Does Asset-Based Lending Work? Asset based financing can come in several different forms. For example, your business might sell its outstanding invoices via an account receivable factoring arrangement as a short-term cash flow solution. Or you might apply for equipment financing for your business to cover the cost of essential machinery or equipment your company needs to operate and use the purchased equipment to secure the loan. With an asset-based line of credit, you receive a credit line you can draw from that is secured by your accounts receivables or current inventory. Each financing solution above is a type of asset-based lending because the loan or line of credit the lender issues is backed by collateral. Depending on the lender and the type of asset-based loan you’re seeking, you might be able to offer several types of collateral, such as: Account receivables Inventory Real estate Equipment Cash and cash equivalents How Much Can You Borrow? Depending on the lender you work with and other factors, your business might be able to borrow up to 80% of the face value of its accounts receivable. When taking out an equipment loan to purchase equipment, eligible borrowers may be able to secure up to 100% financing. However, if your goal is to use equipment your business already owns as collateral for an asset-based loan, some lenders may be willing to extend only up to 50% of the equipment’s value (depending on the type of equipment, its condition, projected depreciation, and other details). Pros and Cons of Asset-Based Financing If you’re considering applying for an asset-based loan to secure additional capital for your business, it’s important to evaluate the pros and cons associated with this type of financing. Benefits of Asset Based Financing Qualification requirements - Perhaps the biggest appeal of asset-based financing is the fact that these loans and lines of credit tend to be easier to obtain, compared with traditional business funding options. Cash flow challenges, limited time in business, and even poor personal and business credit scores may not be deal-breakers with this type of financing, depending on the lender. Fast funding - Certain types of asset-based lending may feature faster funding speeds compared with traditional business loans (especially SBA loans). Accounts receivable loans, for example, could provide eligible borrowers with access to capital in as little as 24 hours. Less personal risk - With traditional business loans, the business owner often has to sign a personal guarantee to secure funding. Asset-based financing, however, may not feature this requirement (though it’s important to verify the details before signing any financing agreement). Risks of Asset Based Financing Higher costs - It’s common for asset-based financing to feature higher interest rates and fees compared with traditional business loans or lines of credit. In some cases, the cost difference could be significant. Some assets may not qualify - Your asset will need to satisfy a lender’s criteria to qualify as collateral for an asset-based loan or line of credit. In general, acceptable assets are high value, have a low depreciation rate, and are easily converted to cash. Loss of asset(s) - If your business defaults on its debt, you risk losing the asset(s) it pledged as collateral. Is Asset-Based Lending Right for My Business? Asset-based financing can come in many different shapes and sizes. Therefore, the best way to determine whether a financing solution makes sense for your business is to research and ask questions before you apply for any new loan, line of credit, or cash advance. First, you should make sure your business can afford to borrow additional money. If you’re confident you can manage the new indebtedness and the repayment schedule that involves, you should then assess the risks, benefits, and costs. Finally, take the time to shop around and compare business financing options. Interested in asset-based lending and how your business might benefit from this type of financing solution? Learn more about accounts receivable financing here.