If you are running a business, the chances are that you have some assets under your possession. But to grow and flourish, you may require some working capital. For that, consider the line of credit and asset-based loans. This specific type of financing is usually termed asset based lending.
So, a business that requires immediate cash flow, despite the collateral assets (like equipment, inventory, accounts receivable, and many others), usually adopts asset-based lending. In cases where traditional banks and money lenders refuse to offer a loan, this line of credit works best.
Interestingly, all your assets are not on sale in this form of lending. Instead, it is used as collateral against which money is lent to you. If you fail to repay the loan, the lender would then capture the assets.
If you are planning this, it’s prudent to learn all the perks of the same.
The Benefits of Asset-Based Lending
There are several advantages of choosing this specific line of credit-
● Low Cost
If you compare asset-based lending with other financial solutions, such as factoring, you’ll notice that this program comes at a low cost. It is priced at an annual percentage rate. In factoring, prices are discounted at a percentage of the absolute value of the invoice.
● Good Use of Assets
A business with valuable fixed assets can be best used by leveraging them for extra working capital. It is usually not possible in other types of loans.
● Easy to Obtain
Getting asset-based loans is far easier than any other method. This is because it’s based on putting the business assets as collateral to secure a loan.
It also provides security to the lender, making it easier for them to extend the loan.
● Great Flexibility
Compared to other loan methods, asset-based loans come with greater flexibility. There’s no restriction on the utilization of funds that you avail, as long as it is employed in the business.
Additionally, as the value of your assets grows, the funding increases simultaneously, too.
- It’s Great for Small Businesses
Any business can use this type of loan as long as they have assets on their balance sheet. It may be difficult for small businesses to acquire the traditional forms of loans, especially if they’re new in the market. In this case, they can opt for asset-based loans by keeping their assets as collateral. They can get the capital they need without the uncertainty associated with the traditional types of loans.
- Few Financial Covenants
Asset-based loans need only a few covenants like debt service coverage and net worth since they are provided against collaterals. Therefore, managing these loans and being compliant is much easier.
- Quick Retrieval of Funds
Businesses that meet the criteria for asset-based loans receive approval in a short span of time. The process of applying for this line of credit is much faster than traditional loans. Hence, you get your capital faster and in a simpler manner than other lines of credit.
According to reports, the asset-based financing market is valued at $4.5 trillion currently. This number is expected to grow to $6.9 trillion by 2025.
Undoubtedly, asset-based lending a lifeline for a significant chunk of businesses and consumers worldwide. It could also be the best option for you. Now that you are aware of all the advantages attached to this line of credit, hopefully, you can make a well-informed choice!