For businesses who have less than-stellar credit, or have yet to establish credit, it may be difficult to acquire unsecured funds when they need them. Fortunately, most companies have something of value they can put up as collateral, which opens the door for asset-based lending. We’ll look at how it works, and what can be used to secure the loan.
The two major forms asset-based lending takes are term loans and lines of credit. Like any other term loan, an asset based one will come from a traditional bank or credit union where an agreed-upon sum will be paid back monthly at a fixed interest rate over a specified number of months. In a line of credit arrangement, the lender approves a certain amount that the borrower can draw from, and they use it as needed over a term period. It should be noted that while these are the most typical forms of this type of lending, merchant cash advances, factoring, and ACH financing are sometimes offered as well.
Perhaps the most common form of collateral that is put up for asset-based lending is real estate. If the business or business owner owns their property, banks see that as a very safe investment. Outside of the business, the owner may put up other properties they own, like their home, a rental property, or other commercial piece of real estate. Land that is owned by a company or business owner can also be considered.
Receivables or Invoices
Money that is owed to a company is also considered an asset. This concept is a little more abstract, but it can be acceptable in asset-based lending. Essentially, in this arrangement, you would agree to pay a financial institution the amount of future monies received from outstanding invoices if you should default on the loan as collateral.
Inventory and Equipment
Much like real estate, inventory and equipment are solid assets to use for collateral because they are physical goods that a bank can liquify. You will just need to work with them to assess a fair market value for the materials.
Credit Card Processing and Bank Accounts
Another abstract item that can be used for asset-based lending collateral is a percentage of credit card transactions, or access to bank accounts. This usually goes into a factoring or merchant cash advance scenario, but it is an option.
For many small businesses, using their assets to leverage lending is a win/win, and can often be done through their primary financial institution.