Did you know that startups that took out loans are more likely to make profits than those without debt?
That’s right! Businesses that took out a loan made twice as many profits within three years than those that didn’t. Also, business borrowers with debt are 19% more likely to survive than those with no debt.
After all, running out of funds is the second-leading reason startups fail. Without funding, you can’t continue operations, pay your people, or develop new products.
The good news is, traditional loans are no longer your sole option for business funding. Today, you can choose asset-based lending vs tradition lending.
What exactly is an asset-based loan though, and how does it differ from regular loans? That’s exactly what we’ll cover here, so be sure to keep reading!
Asset-Based Lending vs Tradition Lending: The Distinction in Definition
Let’s start by comparing asset-based lending vs tradition lending using their definition.
What is asset-based lending and how does it work?
Asset-based lending (ABL) is a type of lending service based on a borrower’s assets. These can be anywhere from a business’ current accounts receivable, inventory, or equipment. Some lenders also allow any property of value to serve as collateral for the loan.
What about traditional lending?
In its “purest” form, traditional lending is a type of lending offered by banks. Unlike asset-based loans, traditional loans don’t rely on “security” (AKA collateral). Instead, lenders pay closer attention to a business’ cash flow and credit score.
The Difference in Qualification and Eligibility Factors
Speaking of credit scores, SMBs aren’t doing so well, considering the best scorer — Hawaii — only had a “fair” score in 2018. The state’s Experian Intelliscore Plus score that year was 54.6. Take note that Hawaii already garnered the highest average Experian score that year.
It’s no wonder then that in November 2018, big banks only approved 26.9% of small business loans. Smaller banks approved more, but still rejected 49.8% of loan applications.
If your business is on the higher end of credit ratings, then you may still consider a traditional loan. If not, then know that asset-based loans are good traditional lending alternatives.
For one, because ABL lenders are more concerned about the quality of your business’ assets. Meaning, so long as the collateral you put up is valuable to the lender, then you have a good chance of securing the loan.
Second, ABL lenders are more interested in your ability to make payments now and in the future, not the past. As such, they qualify based on collateral that has a high liquidity rating.
Types of ABL Services vs Types of Traditional Loans
There are at least four types of asset-based loans you can choose from. Of these, invoice financing is the most common and popular. You can, however, use your inventory and equipment as collateral, too.
The fourth is the business line of credit, which lenders also base on your business’ property. They’ll evaluate your business’ liquidity and then base the limit of your credit on it. It’s much like a credit card, wherein you only pay interest on the amount you’ve used.
That said, you can utilize asset-based loans as an on-going source of funds for your business. So long as you make on-time repayments, then you can “refresh” your credit limit.
Traditional loans, on the other hand, are often only installment or term loans. You get the funds in a lump sum and then pay it back in increments, usually on a monthly basis. Lenders apply interest on the entire amount, and not only on what you’ve used for that month.
Let’s say you’ve borrowed a $50,000 traditional loan with a 10% interest rate. That means you’ll pay $5,000 interest on top of the loan amount.
Even if you only use $30,000 of that in the first month, the entire 10% interest rate will still apply on the entire $50,000. If you choose a repayment term of say, 12 months, you’ll pay $5,416.66 a month. You may be able to pay back the entire loan early, but be careful as there may be an early repayment penalty.
Also, some traditional lenders are wary of lending money to those with existing loans. Meaning, if you choose not to make an early full repayment, you may not be able to apply for a new loan.
Not all term loan lenders are this strict, and many will still approve you for easy business loans. But at least, you know that you have alternatives in case you need quick access to funds.
The Flexibility of Lending Standards
As mentioned above, some traditional lenders look into borrowers’ existing loans. That means they pay serious attention to a business’ debt-to-capital ratio. The more loans that a business already has, the lower its chances of getting another loan.
Whereas asset-based loan lenders are more flexible or “lenient”. Again, this is due to them prioritizing a business’ liquidity than its cash flow or credit scores. This is why ABL firms are easier to fund small businesses that have tangible assets and a bright future.
Processing and Approval Times
Shorter loan processing times are also one of the top asset-based lending benefits. The most reliable asset-based loan lenders can even get you your funds in as little as 48 hours! This makes such loans a huge help in case you experience financial emergencies.
Traditional loans, on the other hand, can take several months to process. Conventional lending institutions, after all, need to analyze your financial statements. They also need to pull out your credit report and confirm your creditworthiness.
Get the Funding You Need for Your Business Now
There you have it, the primary differences of asset-based lending vs tradition lending. As helpful as traditional loans are, they can be difficult to apply for, not to mention qualify for. That said, consider asset-based loans as your funding go-to, especially if you feel that your credit score won’t cut it.
Ready to get the funds you need now with an asset-based loan? Then be sure to check out our inventory line of credit offers! You can also ring us up if you have any questions about our business loan programs.