How Asset Based Loan Financing Works
- March 26, 2021
- Written by : Elizabeth Beall
Owning a business is not always a smooth road. Sometimes the bumps in the road are finance related and cannot be solved alone.
At this point, owners begin searching for ways to earn money, knowing that due to the crisis at hand, their credit score may not be above-average and they may not have an excellent financial history within the last few months.
However, if you know that you will earn the money borrowed, plus more, in a reasonable amount of time, then you can feel comfortable choosing a loan option that leaves your current ability to gain funding up to the money youâ€™ll earn in the future. This option is called asset based lending.
What is an asset based loan?
Asset based lending is a financing solution in which the lending is secured by property, accounts receivable, or other company assets; these loans are utilized by companies that need immediate funding to operate and grow.
For businesses that own large amounts of worthy collateral, this is a great way to satisfy all of your working capital needs. Weâ€™ll get into what kind of assets are accepted for collateral in a later portion (see below).
Why would companies need an asset based loan?Â
It is common for business owners, at some point during day-to-day operations, to be presented with a need to better manage cash flow or keep up with normal business activities; whether the problem stems from growing too fast or just covering costs, an asset based loan enables the company to position themselves in just the right way, say our experts.
How does asset based loan financing work?
Asset based loans are a win-win for both the small business owner and the lender. The process is simple.
When the need is there, the owner searches for a lender and would then apply for an asset based loan. Along with your application, a collateralized asset sheet is required for review. At this point, the collateral is evaluated based on its value, and from this, the lender will be able to better determine how much your company would receive from the loan.
The more valuable the asset you put up as collateral, the more you will receive. Plus, the better the asset, the more comfortable your lender is giving you longer terms and lower rates.
Once your collateral has been given to the lender, you will receive funding within two weeks. At the time of repayment, the loan will be repaid plus an interest rate, and at this time, the collateral will be returned to the borrower.
Do you have to use collateral for asset based lending?
Yes. Using collateral is required for every asset based loan. The reason for this is in the name of the loan; a company must have viable assets to temporarily exchange for working capital.
The primary reason in using collateral is to give lenders a fallback plan in case you, the borrower, default on your loan. At REIL Capital, asset-backed loans can be structured as either term loans or lines of credit, allowing you to borrow up to 85% of the value of the assets put up as collateral.
What kind of assets are accepted for an asset based loan?
With us, assets generally accepted for an asset based loan include accounts receivable, equipment, inventory, or real estate. When you provide something (an asset) valuable upfront, in return for something (capital) else valuable, it is a secure, trusted exchange for both the lender and the borrower.
If the asset is used as collateral, then the asset must be of great importance to the borrower; being that this is the case, it is expected that the business owner would return the amount borrowed as soon as possible to regain control of the asset. When this happens, business owners do not collect large amounts of debt, and lenders do not wait long periods for the debt to be repaid.
What are the documents necessary to apply for asset based financing?
Depending on your chosen lender, required documentation for asset based financing will vary. At REIL Capital, we ask for three things:
- Completed application
- 3 months of business bank statements
- Collateralized asset sheet
What are the requirements for an asset based loan?
Luckily, qualifying for an asset based loan does not depend on your financial history or credit score, we mentioned previously. Instead, lenders look at the worth of your assets.
In addition to this, lenders will expect business owners to meet specific requirements. With us, we list the following qualifications:
- Credit score of 600+
- $100,000 in annual revenue
- 12+ months in business
This loan options differs from the typical unsecured loan. If you have researched on your own and discussed small business funding options with a financial specialist, then you are already aware of the three most looked at components of your business by lenders: a strong cash flow profile, revenue history, and solid credit.
Fortunately with this loan option, low revenue, cash flow dips, or poor credit, does not stop a businessâ€™s ability to acquire an asset based loan.
What are typical interest rates for an asset based loan?
With us, rates start at 10%.
How fast can I get funding from an asset based loan?
We typically get your funding to you within two weeks.
How much will I receive from an asset based loan?
As mentioned, you can borrow and receive up to 85% of the value of the assets put up as collateral.
What determines how much money I get for an asset based loan?
The value of the asset being used as collateral. For example, you could receive a very large approval amount if you own a large amount of property.
Asset based lending can get tricky and unfair. At REIL Capital, we make sure you receive the absolute greatest amount for your collateral with low rates and long terms. Businesses need to continue day-to-day operations, and we can help you do that with our asset based lending option.