Asset Based Finance
Which business needs money?
Every business, no matter the size, needs cash to succeed and grow. Often getting a small business loan is the priority, whether you are limited liability corporation (LLC) a sole proprietorship or a start-up enterprise.
Nevertheless, lenders will always put you and your business under a financial microscope to check the project viability before passing over a penny. They will look at your balance sheet and projected cash flow, your credit rating, and your company history. Once you pass a credit check, the lender will investigate your asset portfolio; assets are lenders’ insurance to guarantee payment.
What are assets?
1. Owner-occupied home
2. Cash savings or deposits
3. Business inventory including machinery and equipment
Four Ways to use Assets to Secure Loan Finance
1. Maintain detailed records of all assets
Banks and lenders, notoriously undervalue assets, because if the borrower defaults, the lender will have to find a buyer and sell the items. Find an independent appraiser to value your assets.
2. Know what forms Asset Collateral
There are two types of assets – a) those you own and b), those which you still owe money. Banks will often consider a house mortgage as an asset. However, the most viable assets are those with full title ownership. For example boats, cars and planes!
Vacant land is not viable, even if you have full title. A working farm, on the other hand, will be given a more pleasing look.
3. Accounts Receivable and Business Inventory do hold viability
For example, if you have a proforma invoice for goods with an inventory of sellable items and buyers, a lender will often lend against it. It is more tricky to negotiate a loan and never a done deal, however!
4. Cash is King! Savings and Deposits will be allowed as collateral
Asset-based loans are low risk, and banks will hold CDs (Certificates of Deposit) and other financial investments as collateral. Your money is safe as long as you continue to service the loan.
A word of warning: If you default, you will lose everything!
Any business with assets of value will find this method useful to raise a less expensive or collateralize loan. The lender has some security if the loan unpaid and will “attach the asset” if the money to recoup funds.
Pros and Cons of Asset Based Finance
- Usually a less expensive loan to take
- Tends to feature fewer covenants than other types of financing and those it does include tend to be more flexible
- Repay the money as they need to without being constrained by set time frames that are commonly found in term debt or other debt instruments
- Asset-based lending tends to be more expensive than other financing, often three to five percentage points more expensive than a typical commercial lending relationship, however, it is less expensive than cash flow or stretched-term debt in the marketplace
- It is considered relatively dangerous to rely on short term assets for long-term debt