Asset-Based Lending: What is the Upside and Downside?

A firm may wish to think about an asset-based loan or line of credit if it has assets and needs working capital to function and expand. For a variety of reasons, many businesses struggle with a lack of operating capital. These companies can finance their day-to-day operations with a variety of stress-free financing choices. 

Among these, asset-based lending may be a particularly good alternative for companies that have a lot of assets but struggle to make money. To help you decide whether asset-based lending is the best option for you, we will examine the advantages and disadvantages of this financing method in this post.

Asset-based lending is the term for this kind of business funding

A loan or line of credit given to a company that is backed by collateral is known as asset-based lending. Inventory, equipment, accounts receivable, and other balance-sheet assets are just a few of the many forms of collateral that are utilized in asset-based lending.

This kind of financing works best for companies who need money to grow or deal with a cash flow crisis but have assets like a lot of inventory, equipment, or accounts receivable. Certain business credit lines or loans could be some may be based on the combination of multiple assets, while others may be secured by a single asset.

If business owners are unable to obtain finance from a bank or traditional lender, they frequently turn to asset-based lending. It's crucial to remember that you don't sell the assets when you use asset-based financing. Rather, you are only taking out a loan against them. Additionally, because the asset is used as collateral, the lender may seize it if the company is unable to make payments.

The Upside

The benefit is that it's simpler to get than corporate credit lines and loans

Qualifying for an asset-based lending program is simpler since having leveraged assets is a crucial prerequisite. In asset-based lending, the lender is given security by the collateral used to fund the loan or credit line.

Make excellent use of your valuable assets

Leveraging fixed assets on the balance sheet allows a corporation to get more working cash. Regardless of whether the company has already invested in inventory or business equipment, such investments might be used as leverage to get more money for the company.

More adaptability than other forms of funding

As long as the money is being utilized for business purposes, there aren't many constraints on how it can be used in an asset-based financing arrangement. The funding may rise in tandem with the appreciation of your assets because it is backed by the value of your assets.

Less expensive than comparable options

Most asset-based financing schemes are less expensive than comparable options like factoring. In contrast to asset-based loans, which are priced using an annual percentage rate (APR), factoring lines are priced by taking a percentage off the invoice's full value.

The  Downside

There are many downsides that you need to consider as well. Some are explored below. 

Not every asset can be used as collateral.

An asset cannot be used as collateral for a loan or line of credit unless it satisfies the requirements stipulated by the lender. An asset must have a high value, a low rate of depreciation or appreciation, and be readily converted into cash in order to be eligible.

More expensive as opposed to a conventional loan

When compared to typical loans, the total cost of asset-based loans or credit lines is increased by loan administration and origination fees. Compared to typical lending, the initial underwriting, collateral evaluation, and monitoring costs are significantly higher and more involved.

Danger of losing priceless possessions

The asset that was pledged as collateral to secure the loan or line of credit may be seized by the lender if the firm is unable to repay the loan. The lender may sell the collateral to recoup the funds that were disbursed to the borrower.

Bottom Line

Examine the advantages and disadvantages for your small business before determining whether asset-based lending is the best option for you. Lending based on assets could be a good choice for the appropriate business under the appropriate conditions. Check out JS Bank for various asset based lending options to diversify your portfolio.