Business Line of Credit
A business line of credit gives access to a pool of funds to draw from when you need capital.
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Asset-based lending is any type of financing that’s secured by tangible assets—including a business’s accounts receivable, inventory, machinery, or other forms of collateral. Typically, businesses can borrow 75% to 85% of the value of their accounts receivables or around 50% of the value of their inventory or equipment.
Compared to other small business loans, asset-based lending is easier to qualify for—as the tangible collateral mitigates risk for the lender. In the case of default, your asset-based lender can recoup their losses by seizing and selling the collateral.
Is asset-based lending right for your business? Use our guide to find out.
There are generally two types of asset-based lending: traditional business term loans or business lines of credit. In either case, an asset-based lender, typically an online lender, offers you an advance of capital based on the market value of your secured assets.
Desirable assets are those that can be quickly and easily liquidated. You can usually borrow between 75% to 85% of the value of your accounts receivables and around 50% of the value of your inventory or equipment.
If your asset-based lending is a term loan, you’ll pay back the advance, plus interest, over a designated period of time. On the other hand, if it’s an asset-based line of credit, you’ll be able to draw on the credit line as needed, and only pay interest on the funds you’ve used.
In either case, your assets are used to secure the financing—and in the case of default, your lender will be able to claim the assets and sell them to cover their losses. Many businesses seek asset-based lending to cover working capital and cash flow needs, especially when they can’t otherwise qualify for financing.
Due to the differences in financing products, lenders, and business qualifications, the interest rates for asset-based lending can vary widely—ranging anywhere from 7% to 30%.
Overall, you’ll generally find that interest rates are higher than what you’ll find with bank products since most asset-based lenders are alternative lenders. However, you’ll typically see lower rates compared to unsecured business loans because your tangible assets mitigate the risk for the lender.
Similar to interest rates, there’s no real consistency amongst asset-based lending terms. In fact, the terms associated with this type of financing vary largely based on the type of collateral that’s used to secure the loan.
As an example, if accounts receivable is used to secure the loan, the terms are usually very short—based on the payment terms of the outstanding invoices. With machinery or equipment, on the other hand, the terms may be much longer—five or six years, up to the projected life of the piece of equipment.
There are a variety of types of collateral that can be used for asset-based lending. Here are some of the most common examples of asset-based loans, depending on the type of collateral your business has:
If you’re a service-based business that invoices customers, any receivables due within 30 to 90 days can be eligible as collateral for an asset-based loan. In this case, the size of the loan your business qualifies for is proportional to your outstanding receivables—the more you’re invoicing, and the greater the value of your invoices, the more you’d be able to borrow.
It’s important to note that an asset-based loan that uses invoices as collateral—in other words, invoice financing—is different from invoice factoring. When working with a factoring company, the lender purchases your outstanding invoices outright in exchange for a flat sum, then collects your customers’ payments for you.
Once they collect the full amount of your accounts receivables, they’ll pay you the difference, but keep a percentage for their services. So, where an asset-based loan using accounts receivables is a true loan, invoice factoring is actually a sale.
Use our guide to learn more about accounts receivable financing.
If you operate a manufacturing, wholesale, or retail business, chances are you have a stockpile of inventory.
In this case, inventory can serve as collateral for asset-based lending—an asset-based lender appraises inventory that you have to determine its resale value, and that value can be used to secure your loan.
Then, you can take out your loan and use your inventory as needed. If, however, you fail to make payments or default on your loan, your asset-based lender would have the right to repossess that inventory (or other inventory of similar value) as repayment for your debt.
Manufacturing equipment, vehicles, commercial kitchen appliances, computer systems—almost any machinery or equipment that your business owns—can be eligible collateral for an asset-based loan, like an equipment loan or business auto loan.
Generally speaking, the higher the value of your business’s owned fixtures, the more funds you’d be eligible to borrow. But remember: You need to own your equipment outright for it to be eligible as collateral in an asset-backed loan. More specifically, your business needs to own that equipment, not you personally.
In certain cases, any real estate that a business holds—like owned retail or manufacturing space, land owned by a development company, or other real estate property—can be considered a fixed asset eligible for asset-based lending. Usually, though, these situations are tricky and need to be evaluated on a case-by-case basis.
If you’re interested in using real estate holdings to secure an asset-based loan, you’ll first need to get an independent appraisal to determine the property’s market value and any appreciations.
Additionally, you’ll want to keep in mind that if you’re paying a mortgage on the property, you’ll need to have paid off a significant portion in order to use that property as collateral for your business loan.
Asset-based lenders can only consider the real equity component of your real estate holdings—that is, those portions that you’ve paid off and own outright. The mortgaged value of your property can’t be used as collateral, since your mortgage provider already has first rights to that property value in the event of a business failure or default.
Now that you have a sense of the most common types of asset-based lending and how it works, you might be wondering why you would opt for this type of financing. After all, to access one of these loans, you’re putting a significant amount of your business’s assets on the line.
Many borrowers turn to asset-based lending because they’ve had difficulty getting approved for financing from traditional lenders. Therefore, you might find that an asset-backed loan is well-suited for your business’s needs.
