What Are Asset Based Loans?
An asset-based loan is a business loan that is based on a company's assets, usually inventory and accounts receivable, being used as collateral. You use your current financial revenue as leverage for borrowing. They are usually based on anywhere from 70-80% of receivables, and as much as 50% of finished inventory.
Asset-based loans are ideal for companies who need working capital to grow or operate. When a company has cash flow problems, asset-based loans help them to manage things like daily operations so that they can continue to grow their business.
Asset-based loans are typically for small or mid-sized companies with a stable financial outlook and assets that they can use as collateral. Their assets, however, cannot be owed to another lender. They must also be in good financial standing without any pending legal, tax, or other serious issues.
The amount of money you are eligible to borrow is determined by the lender and is a percentage of the total amount of collateral that a company has.
Typically, lenders will set a maximum of anywhere between 75-85% of their accounts receivable balance. For inventory and equipment, the percentage is lower – somewhere around 50%. The limits are determined according to the assets, so the base will fluctuate both over time and between companies.
Due to the nature of asset-based loans, there is more risk involved than other traditional loans. Most asset-based loans are priced according to an annual percentage rate, but there are also other service costs associated. Usually, the APR for the loan will range anywhere from 7-17% or more.
The Biggest advantage that you get with an asset-based loan is that you can use your assets as collateral. Many small to mid-sized companies are not in a financial position to take out a large loan based on their financial credentials.
Using collateral to secure a loan is a way to get around other limitations to borrowing. And it is also a great way to have the capital necessary to grow your business.