Is Asset-Based Lending Right for Your Company?

Depending on the nature of your business, asset-based lending might be a viable solution to your company’s financial needs. These loans are based on the existing assets of your business; essentially, your inventory and accounts receivable will be used as collateral. The value of the secured assets determine what the amount of the funding will be. This is based on an agreed percentage, usually in the range of 50% for finished inventory, and 70% to 80% for receivables. The key consideration here is that you will be potentially risking your future revenue in order to get access to immediate funding.

One of the main advantages to asset-based lending is that it will provide ready cash to companies that are underfunded, experiencing rapid growth, are in a lot of debt, or are in the middle of a financial recovery. This kind of loan may help a company that just needs funds to keep growth on track or to get over an immediate cash flow problem. Distributors, manufacturing companies or companies in a service industry are good candidates for these loans, which are well suited to the needs of businesses that experience seasonal or cyclical ebbs and flows in their balance sheets. Also, acquisitions are often financed with these types of loans.

Even though asset-based lending may seem right for your business, it may be difficult to secure if your company’s receivables are not of a high quality. Potential lenders will be looking at what sort of customers you have, attempting to identify the ones with excellent credit ratings and those that pay within 60 days. Small businesses or individuals may not be recognized as being eligible receivables.

Another downside is the cost. In addition to widely varying interest rates, many banks may add fees for due diligence and audits. Many banks, especially the larger ones, may want to assume your other banking relationships and ask for your personal guarantee. Also, most providers of asset-based lending will need your customers to send payments directly to them. Depending on your situation, it may be less than desirable to have a third party controlling the cash flow of your business.

There are a huge number of lenders that offer asset-backed loans, but it may take a good deal of research to find a bank or finance company that will extend lines of credit to a company that’s new. Most lenders would prefer to loan larger amounts, as the cost of monitoring is about the same regardless of the size of the loan.

Even so, if your company has a good track record of clients paying their bills on time, a good reporting system in place, and sound financial statements, it shouldn’t be difficult to secure an asset-based loan.


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