The Difference Between Traditional Lending Options and Asset-Based Lending
Some things are simply par for the course when you’re applying for a small business loan from a bank. For instance, every applicant needs a great credit score or a business that’s already profitable and likely to be seen as a good credit risk. However, not everyone qualifies for a traditional loan and some people simply prefer a different approach. Asset-based lending can be a wonderful alternative to traditional lending for many reasons.
How Does Asset Financing Work?
When you apply for a traditional loan at a bank, you and your business are fully evaluated to see if you’re a good risk or a bad risk. If you’re seen as a good risk, you’re approved for a certain amount of funding and enter into an agreement to pay it back according to the associated terms. When you take out a loan based on assets instead, those assets are used as collateral. Their value is what determines how much funding you’ll be approved for.
The funds you receive will usually work similarly to a revolving line of credit, meaning you can use some of it, pay off what you’ve used, and use it again toward other expenses in the future. However, some asset-based loans work more like the traditional term loans you might be more familiar with. Types of assets commonly used as collateral include commercial property, inventory, and valuable equipment. Even accounts receivable can be used as collateral in many cases.
This type of loan is generally much easier to qualify for because the lender knows that one way or another, they’ll get their money back. Should you default on your loan, they have the right to liquidate your assets and be reimbursed that way instead.
Is an Asset-Backed Loan Right for You?
Asset-based lending is a great solution for business owners who haven’t had much luck securing traditional loans that actually meet their needs. However, that’s far from the only reason to consider one. It’s also a great solution if:
- You need the loan in the first place to fund a rapidly growing business that’s already successful.
- You’re looking for a financing solution that offers flexibility as far as how you can use it.
- You’d like to actually leverage what your assets are worth to grow your business.
In other words, asset-based lending can be a simple and useful way to keep your business growing and thriving. How could it help your business?