Diving Deep into Asset Based Lending
Asset-based lending is a type of financing secured by tangible assets. This includes accounts receivable, machinery, inventory, or other collateral. In most cases, a business can borrow 75-85% of their receivables or 50% of their inventory/equipment. Compared to other types of financing, this is easier to qualify for since the collateral minimizes the risk for the lender. If you default, they take your collateral and sell it.
How Does it Work?
Typically, there are 2 types of asset-based lending:
Traditional business term loans
Business lines of credit
In both of these types of lending, the lender will give you an advance of capital based on the value of your assets. Assets that can be quickly and easily liquidated are most desirable. As mentioned, you will usually be able to borrow 75-85% of receivables and 50% of equipment/inventory.
If the loan is a term loan, you’ll pay back the amount as well as interest over a specified timeline. If it’s a line of credit, you can use it as needed and make interest only on the funds you used.
Applying for Asset Based Lending
There are several steps in the process of applying for an asset-based loan. Some of these steps are different than those for applying for a traditional business loan.
Though the assets are the primary concern with asset-based lenders, the financial standing of the business matters as well. The lender will most likely ask to see the following:
Bank statements for business
Tax returns for business
You’ll need the following to prove assets and values to lenders:
Accounts receivables aging statement
List of inventory
List of machinery and equipment
Ensure assets are “free & clear”
Your lender will perform a UCC search to find out whether any other creditors have a legal interest/lien against the business. They will make sure the assets are “free and clear”, that is that no other debtor has rights to the property. They want to be first in line to seize the property if there is a default.
Complete an application and submit documents
The next thing you must do is complete the loan and submit your documents. If you need help, you can work with a loan specialist.
Once you’ve done this, you’ll need to wait a few days or weeks for the lender to review your submission. If the lender feels you are a candidate for an asset-based loan, they will contact you.
Preview offer & commit to due diligence
After the lender has reviewed your application and financials, they will likely request a commitment to due diligence. They do this to ensure that you are committed. Otherwise, they risk doing all that work for nothing.
They will present you a non-binding preview of what they are willing to offer you, the interest rate, and the terms they may be able to provide.
Undergo field audit
As part of due diligence, the lender will want to do a field audit of your business. A representative will meet with you to determine if there’s a good fit between you and the lender. An asset-based lender wants to build a long-term relationship with their borrowers- more than traditional lenders.
Wait for approval & funding
Once the audit meeting is over, you’ll have an idea of whether or not you will be approved- but at this point, all you can do is wait. When your loan is approved, you’ll have to finalize the paperwork and within a few days, you’ll have access to your funds.
If you are a small business in need of asset-based lending options, contact Masters Commercial Capital Group. They will be more than happy to walk you through the process.