Need more working capital for your business, but don’t have enough credit for a conventional loan?
Before you throw in the towel, consider another option: asset-based loans. Asset-based loans offer small business financial flexibility when they need it.
To secure an asset-based loan (ABL), you must first have business assets to use as collateral. The lender you use will then offer you a line of credit based on the amount of asset and collateral in question. Applicable assets include accounts receivable, inventory, and equipment.
We all want our businesses to be profitable and to expand. We take risks as business owners in order to secure a better future for our business, finances, and families. Starting a business can be challenging, but securing a line of credit doesn’t need to be an impossible endeavor.
If you’ve already tried other ways to get a loan, but were denied, then an ABL could be right for you. Read on to learn 6 ways asset-based lending works for small businesses.
How Asset Based Lending Works for Small Business
Asset-based lending can provide the capital needed to expand your small business. Take note of these six ways in which asset-based lending could help grow your business and offer you more financial flexibility.
Since asset-based lending offers a line of credit based on your company’s financial status and your assets as collateral, there are no upfront payments to be made on the loan specifically.
There are, however, fees involved in an ABL transaction. Interest payments are included in the loan and additional fees such as due diligence to review your company’s financial status and audits may be necessary as well.
Talk with a lender in advance about the fees involved in an ABL. Shop around to find the lender with the lowest fees and interest rate and the best reputation for handling asset-based loans.
2. Quicker Turnaround
In contrast to conventional business loans, ABL’s have a quicker turnaround. ABLs require less paperwork and documentation which makes the process quicker.
While the process is slowed down for a conventional loan, your business could be suffering greatly. With an ABL you can rest easier knowing that it will be secured faster. When it is secured, then you can decide how to best use it so that your business can get back to operating at full capacity or investing to expand the business.
3. Easily Amended
ABLs are based off your current financial standing, business assets, inventory, and equipment. Based off of these assets, your lender provides a percentage of the value as a loan. The percentage used differs from the type of asset used as collateral.
Your business’s financial status can change from month to month, however. With an ABL your lender is continuously involved in amending your line of credit by increasing it or decreasing it. While a decrease could be a frustrating occurrence, it still leaves you with capital to use without revoking your loan entirely.
The lender works with you to get the line of credit you need based on financial standing. If you would like an increase in your line of credit, then your lender can oblige as well if your financial status is worthy of an increase. This allows your business to continue growing and not remain stagnant based off a one-size-fits-all loan size amount.
Ask your lender in advance what percentages they offer for the type of assets used as collateral. Ask the lender about a renewal process for your ABL based on any change in financial status.
4. Less Lending Criteria
Conventional business loans require a ton of documentation and lending criteria. To commonly secure a conventional loan, a business must provide documentation of the time in business, financial ratios, personal or corporate guarantees, and collateral to back the line of credit needed.
The requirements for maintaining a loan are called covenants. Covenants for a conventional business loan are stricter and allow for less flexibility.
Covenants for a conventional loan include specific financial and debt ratios, personal or corporate guarantees, an agreement to a confession of judgment, and maintaining a certain net worth. While an ABL also requires covenants, aspects of an ABL such as the ability to change the loan amount on a regular basis allows a small business flexibility in how they maintain their line of credit.
When seeking a financial loan, always ask the lenders what their specific requirements are, the documentation needed, and ask about convents for a loan prior to signing any paperwork. Additionally, ask what fees you may be charged if a covenant is unable to be maintained.
5. Helps During Hard Times
If your company does not currently have the cash flow needed to expand or pay for operation costs, then an ABL can help. Instead of liquidating your assets and throwing in the towel, an ABL can help keep your business operational.
ABLs are also great for start-up companies who need a boost in order to see a profit.
6. Flexible Spending
ABLs allow your business to spend the line of credit offered with fewer restrictions. An ABL doesn’t decide how you spend the loan within your business.
In order to reduce the risk of defaulting on a conventional loan, the loan can sometimes mandate how a business is and isn’t allowed to spend the money given to them. Think of this as babysitting your business in order to make sure that you aren’t taking risks considered to be too risky.
If you need to take risks at times, however, then an ABL will offer you the ability to do so. Business can be risky, but that doesn’t mean that risks need to be governed by a lender to offer them peace of mind.
Speak with your lender about any spending restrictions and policies they have in relation to loan spending.
Want to Learn More About How Lending Works and Business Finance?
Check out our blog post about business financing and lending options. By understanding your personal finances, business loans, and how lending works, you can make the best choices possible to expand grow your business.