3 Advantages of Using Asset-Based Loans for Your Company
Asset-based lending is an ideal solution for a company experiencing periods of quick growth but who lack the upfront profits to pay for it. Because of those factors, this type of lending has been utilized more frequently in recent years, especially in situations where a company may be going through a merger or acquisition.
Before getting into the advantages, it’s important to understand what asset-based loans are. In this type of lending, business assets act as collateral for the lender. The assets typically come from one of three aspects of a business:
- Accounts receivable
- Office or manufacturing equipment
- Product inventory
Perhaps the most significant advantage to asset-based lending is flexibility. Unlike other types of loans, there aren’t many restrictions. In fact, as long as the money is used for business purposes, companies usually are free to use the financing however they wish.
Additionally, if the financing is tied to the company’s accounts receivable, as sales grow, the line of credit grows, as well. Unless the company outlook has changed dramatically, there’s no need to undergo the underwriting process with each loan, either. These loans are ideal for companies in startup companies whose revenue hasn’t quite caught up to its growth.
As these loans are based on assets – that is, they are based on the what the company currently controls or expects to receive due to signed purchase agreements – this is a great way to improve a company’s liquidity quickly. Asset-based lending helps to smooth out cash flow issues, such as the ones seen at seasonal businesses or startup companies sprinting towards growth.
Beyond merely improving cash flow problems, asset-based loans have a speedy underwriting process – typically one that lasts only a couple of weeks. Of course, larger companies with complex financial structures may take longer, but that won’t be the case with well-run businesses who already have appropriate financial controls in place.
Additional Lending Options
An asset-based loan would be a great stepping stone to more traditional lending options, especially if the company were previously not eligible for them. Building the company’s credit through asset-based lending allows the company to grow at the right pace and establish a history of repaying loans on time and in full. As the company scales, the increased lines of credit will only further build its corporate credit score, qualifying it for larger loans on better terms.
There are many advantages to take out asset-based financing. Their flexibility and ability to quickly build capital make it an ideal choice for any company in a growth phase.