Understanding asset finance for your business

Asset finance secures lending based on the value of your business assets.

Business owners who need quick access to cash are more frequently turning to asset-based finance as a means to invest in their growth.

Unlike loans that use cash flow to determine credit capacity, asset finance secures lending based on the value of your business assets.

Typically a business applies for a revolving line of credit or term loan, pledging inventory, accounts receivable or equipment as collateral. If you default on your payments, the lender can seize your assets.

Asset financing is easier to obtain than other types of business loans and can be used for any business expense. Read on to learn more about asset-based financing and whether it's right for you and your business.

What types of businesses qualify?

Asset-based lending (ABL) is a suitable borrowing option for retailers, manufacturers, wholesalers, distributors, restaurants and service companies that own equipment, real estate or inventory they can pledge as collateral.

Any size of business can apply for asset financing, which most often appeals to companies looking for money to finance an acquisition, refinance debt, restructure their businesses or invest in growth opportunities. Asset finance can also act as a bridge for seasonal businesses or industries where ‘feast or famine’ sales cycles are common.

If you can show a lender your business is stable and profitable, with detailed accounts and assets that can be financed, you're in a good position to qualify for an asset-based loan.

How much can you borrow?

Lenders determine your borrowing base by looking at the value of your collateral. Typically, you'll be able to borrow a percentage in the range of 70% to 80% on your eligible receivables, and 50% or less on equipment and inventory.

Because the value of assets fluctuates over time, the borrowing base does too. Asset based lenders will want to regularly review the value of your assets to reassess the borrowing base value.

Interest rates vary on asset-based loans, but generally speaking the cost of an asset-based loan is higher than a traditional loan. The cost of borrowing is determined by the type of collateral pledged, the loan size, and general risk.

What you need to know

Before you apply for ABL be sure to keep the following in mind:

  • Expect regular on-site appraisals of the continued value of your assets, especially if they don't easily convert to cash (for example, real estate or machinery).
  • Carefully consider the consequences of defaulting on asset-based loan payments. Could your business continue to run if a lender seized its most valuable assets?
  • Regular reporting is required for asset financed lending. If your credit profile declines, you’ll have to report more frequently on changes to your inventory and accounts receivable.

Be sure to consult with your accountant or other trusted financial advisor in order to obtain their professional advice on financing strategies that best fit your particular business.

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