This type of borrowing is a form of asset-based finance that uses assets on your balance sheet as security against lending.
This includes physical assets can include the following types of assets such as:
- debtors
- stock
- equipment
- machinery
- property
Intangible assets such as intellectual property (IP) can also be included.
How does asset-based lending work?
Asset-based lending works by the asset or set of assets are placed up as security. Once an asset is put up as security, the lender will offer the borrower a loan worth an agreed-upon percentage of the asset’s value.
Lenders prefer to offer larger loans because the cost to monitor an asset-based loan is the same whether the amount of capital being borrowed is small or large.
Benefits of Asset Based Lending
One major benefit of asset based lending is that it can provide businesses with access to capital that they would not otherwise have. This can be especially helpful for businesses that are growing quickly or have seasonal fluctuations in sales.
Additionally, asset based loans tend to have lower interest rates than other types of loans, which can save businesses money over time. Another benefit of asset based lending is that it can give businesses more flexibility in how they use the loan funds.
For example, a business may choose to use the funds to expand its inventory or to renovate its office space. Asset based lending can be an attractive option for businesses that have difficulty qualifying for traditional bank loans.
The following are all positives and advantages of asset based lending
There are few restrictions on how you can spend the facility.
If you meet the eligibility criteria, it can take as little as four weeks to receive the money.
You can borrow and keep hold of equity within your business.
Other forms of finance can be used alongside asset-based lending.
Repayment terms on the money you’ve borrowed can be fixed, allowing for better, clearer planning.
Cash flow can be improved by leveraging the value of untapped unencumbered assets.
Risks of Asset Based lending
Asset-based lending is a type of financing that uses the borrower’s assets as collateral. This can include inventory, receivables, and equipment. While asset-based lending can provide much-needed capital to help businesses grow, there are also some risks to consider.
If the borrower defaults on the loan, the lender can seize the collateral and sell it to recoup their losses. This can leave the borrower in a difficult financial position.
Additionally, asset-based loans typically have higher interest rates than other types of financing, so borrowers need to be cautious about taking on too much debt. When used carefully, however, asset-based lending can be a valuable tool for business owners.
The risk of using an asset based lending facility could be:
Lenders conduct credit checks and due diligence to determine your eligibility, this involves a hard credit check. This type of check will show on your credit report and may affect your credit rating.
If you fail to make repayments, you may face charges as a consequence of defaulting. Late payments may also affect your credit report.
- Potential to lose the assets
Should you fail to make repayments of the assets, the lender may reprocess the asset you’ve put up as security and sell it.
Am I eligible?
To be eligible to asset based lending its worth considering the following:
- Are your business established with assets and a trading history?
If your business is not established or without assets lenders will not be able to lend your business money.
- Are there assets of value on your balance sheet?
The value of the assets on your balance sheet could reflect the amount of finance you’re eligible for.
- Does your business have detailed and accurate financial statements?
Lenders in the asset lending space base their decision on the following:
- Your businesses financial performance
- The company trading history
- The value and type of assets the business holds
Within the company’s financial statements, this information must be set out clearly and show the ability to repay the facility.
- How much is the amount you need?
Asset-based lenders typically provide facilities of £100,000 or more. It’s not uncommon to see providers offering facilities worth £20m and above to larger businesses.
What do I need to consider?
If you are looking to leverage your businesses assets, here are a few questions you’ll need to consider before proceeding with borrowing from an asset-based lender:
- How long is the term of the borrowing period?
- What is the amount of interest payable on the facility?
- What is the advance rate against the company’s assets?
- How much will I pay for the finance facility in the long run?
- Are there any early repayment charges?
F.A.Q:
Is asset based lending right for my business
Asset based lending is right for a business, if the business is rich in assets and poor in working capital.
Why use asset based lending?
Asset based lending is used for companies to realise tied up working capital from an asset, a company would use this type of borrowing if it is rich in assets but poor in working capital.
Asset based lending is a type of financing that allows businesses to borrow money based on the value of their assets. This can include things like real estate, inventory, and accounts receivable.