The Many Advantages of Asset Based Lending
The use of asset based lending practices may have recently increased due to its many advantages and ease of qualification. An asset based loan is a type of secured loan where a company puts up its own resources, such as accounts receivables, as collateral. Loans may be provided as a line of credit that the business draws from as needed. As the business makes profits, the proceeds can be used to pay back the line of credit.
Easier to Obtain
Businesses that can’t qualify for traditional loans may be able to qualify for asset based loans. Some businesses may be relatively new with little to no credit history or may not have sufficient performance records to validate the solvency of the business. Asset based lending focuses more on the business’s assets when determining if the business qualifies. Some of these assets can include equipment, accounts receivables invoices from solvent businesses and inventory. Those assets, along with evidence of successful profit and reasonable financial practices, may qualify a business for a loan.
Improved Cash Flow
These loans can provide companies with an increase in their cash flow. This can be particularly helpful to businesses experiencing rapid growth or challenges with capital.
The application and approval process for asset based loans can be faster than that of conventional loans. Once approved for the loan, the business may have quick access to the funds it needs to pay expenses or increase their cash flow in general.
Asset based loans have the potential to be less expensive than loans based on factoring. Factoring loans can also be granted to businesses that don’t qualify for conventional loans and may appear very similar to asset based loans with regards to how they function, but the final cost of an asset based loan may be cheaper.
Businesses that receive loans based on assets may find the terms more flexible than other lines of credit. For instance, businesses that increase their profits may be able to increase the credit line originally established from the loan without going through the entire application process again. Businesses can also spend the funds received from these loans for whatever they need to use it on, if it is for the business.
A Means To Qualify for Other Loan Products
As a business pays off the loan obtained through asset based lending, it can establish a record of creditworthiness. This may enable it to later qualify for conventional loans at a lower cost in the future.