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Asset-based lending can help small businesses with a poor credit rating get big loans from lenders. It is easier to qualify than other kinds of small business loans since it only requires a business to own valuable assets. There are different factors that determine a lender’s advance rate and the actual cash they grant borrowers. But, the more liquid a company’s assets, the higher the cash it can borrow.
Companies that need working capital to operate or grow their business usually use Accord Financial asset based loans. Usually, companies that apply for this type of financing have cash flow issues that stem from rapid growth. Lenders help them manage the rapid growth issues and position them for continuous growth.
Common Assets Used for Securing Asset-Based Loans
The majority of lenders structure their loans with an advance on accounts receivables. Other asset-based loans include advances in inventory, machinery, real estate, specialized equipment, and buildings.
Does Your Company Qualify for Asset-Based Lending?
In general, asset-based financing is provided to stable small and mid-sized companies with assets that can be financed. The assets of a company should not be pledged as collateral to another lender. Some lenders allow assets to be pledged to another lender but they require that lender to agree to subordinate its position. Also, when qualifying applicants, asset-based lenders choose companies that don’t have serious accounting, tax, or legal issues that could encumber the assets.
How Lenders Determine the Borrowing Base
The borrowing base refers to the amount of money that the lender allows a company to borrow. It is determined as a percentage of the value of the collateral that has been pledged. In general, companies can borrow 75%-85% of the value of their accounts receivable. Usually, the borrowing base of inventory and equipment is 50% or less. Before deciding the borrowing base, lenders will check a company’s ledgers and assets. The amount tends to fluctuate since it involves account receivables.
Asset-Based Loan vs. Factoring
While asset-based loans and factoring are different financing products but offer similar benefits. Both of them use account receivables as their main collateral. But, in factoring transactions, the company doesn’t borrow money. Instead, it sells its receivables to improve its cash flow. The company sells and ledgers its receivables individually instead of finance them in bulk. In addition, the factoring company collects debts, allowing troubled or small companies to have access to funds if they don’t qualify for an asset-based loan.
