Many companies sometimes experience cash flow problems or require extra working capital to fuel their rapid growth. One solution to these difficulties involves taking out asset-based loans. Here are some details to consider when contemplating this form of financing for your business.
Asset-Based Loan Basics
Asset-based loans are business loans that use company assets such as equipment, inventory, and accounts receivable as collateral. The borrowing base is calculated as a percentage of the collateral’s value, usually about 70 to 80 percent of accounts receivables and 50 percent of inventory, equipment, and real estate.
How to Obtain Asset-Based Loans
Numerous financial institutions offer asset-based loans. Some prefer to deal exclusively with substantial loans to larger companies, but if you look around, you can find lenders that also work with smaller businesses. Your loan application is facilitated if you have well-documented finances, inventory that moves easily, and clients with a history of timely payments. Before approving your loan, lenders perform a due diligence process during which they determine the value of the assets that comprise your borrowing base. You are likely to expediently obtain your asset-based loan if you have professionally-rendered financial statements that indicate long-term company stability and assets valuable enough to serve as collateral.
Advantages of Asset-Based Loans
As long as your business is stable and profitable, you can obtain asset-based loans quickly. They are easier to obtain than traditional bank loans or lines of credit and provide healthy cash flow for businesses that are growing rapidly or have seasonal fluctuations of income. Asset-based loans also provide flexibility in spending, as lenders do not usually place restrictions on how your company can use the funds. Additionally, if the loan is tied to your accounts receivables, when your sales increase, the amount of funding available to you usually increases as well.
For more advice on asset-based loans and other financing solutions for businesses, get in touch with Span Capital.