The Pros and Cons of Asset-Based Lending

Many businesses don’t realize the amount of value right under their noses — their unleveraged assets. Thanks to asset-based lending, you can squeeze more value out of your assets by using them as collateral for financing.

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The Pros and Cons of Asset-Based Lending

Many businesses don’t realize the amount of value right under their noses — their unleveraged assets. Thanks to asset-based lending, you can squeeze more value out of your assets by using them as collateral for financing.

However, we understand why many businesses aren’t maximizing the potential of their assets. Few business owners have time to scrutinize their balance sheets.

As a result, they may take on financing sources that don’t suit their needs, leaving them in unnecessary debt. All the while, their assets go untapped.

At Business Capital Consultants, our goal is to get financing that fits your situation best — and that often means scanning your balance sheet to find assets you can leverage to get more funding. 

Of course, we also want you to be an informed borrower. To that end, we’ve defined the asset-based lending options at your disposal and explained their pros and cons below. Read on to learn more.

Types of Asset-Based Lending

  • Asset-Based Loans

Asset-based loans are loans borrowed against one of your assets. You can use inventory, accounts receivables, fixed assets, and many other asset types.

  • Asset-Based Credit Line

Asset-based credit lines offer flexible access to capital up to a specified limit. Collateral types can be the same as asset-based loans.

  • Purchase Order Financing

Purchase order financing is a short-term financing option that lets you borrow against purchase orders you receive from clients or customers. Once you deliver the product in the purchase order, your lender collects a portion of your earnings.

  • Invoice Financing

Invoice financing lets you leverage your accounts receivable for cash. You sell your accounts receivable to a lender, but you don’t receive the full value. The lender keeps some funds as “interest”.

  • Merchant Cash Advance

A merchant cash advance isn’t a loan. Rather, it’s an advance against future credit sales. Your provider hands you a fixed sum of money. In exchange, they take a small portion of your credit sales for a defined time.

The Pros of Asset-Based Lending

  • Lower Requirements

Collateral reduces lender risk, as it ensures they get something of value if you default. Consequently, your credit score need not be as high as unsecured debt. 

Startups and other young businesses will find asset-based lending to be a particularly accessible form of debt.

  • Types of Financing Available

Asset-based lending suits a wide range of businesses since you can leverage several types of assets. 

For example, one business could have an excessive amount of outstanding receivables that you can leverage for funds.

Another firm might leverage their large amount of inventory to get an asset-based line of credit.

  • Fast to Acquire

Most forms of asset-based lending don’t take long to acquire. With merchant cash advances in particular, you can receive your funding in as little as a day.

  • Financing Growth Potential

You can get credit increases on several forms of asset-based lending as your business grows. For example, if you have a line of credit on your accounts receivable and see sales growth, you can get approved for a credit increase with relative ease.

  • Flexibility

Asset-based financing tends to have fewer restrictions on usage than other forms of debt. 

The Cons of Asset-Based Lending

  • Risk of Losing Assets

If you fail to pay back an asset-based loan, the lender can seize the asset you use as collateral.

  • High Interest Rates

Many forms of asset-based lending have high interest or factor rates. Asset-based loans are the only form with relatively low rates.

  • Borrowing Limits

Your borrowing limit is generally equal to the value of the asset. Depending on your situation, you may not receive as much funding as you need.

Is Asset-Based Lending Right For You?

Chances are you’re leaving funding on the table. It never hurts to have an expert analyze your balance sheet and see if you can leverage any assets.

That’s what we can do for you at Business Capital Consultants. If we find any unleveraged assets, we’ll identify the best form of asset-based financing for your business, find an excellent asset-based lender for you, and handle the application process.

Schedule your free 30-minute consultation with Business Capital Consultants today.

Business Capital Consultants is here to help if you aren’t sure which short-term financing source is right for you. We’ll deal with the paperwork and phone calls for you so you can get the funding you need without wasting valuable time.

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