Even if you’re not familiar with the term asset-based lending, you have most likely heard the term collateral in the past. Each of these refers to the practice of obtaining a loan for business operations or growth purposes by pledging a high-dollar company asset. Asset-based lending comes with a mutual understanding between both parties that failure to meet the terms of the loan can result in the lender seizing and selling the asset to recoup its financial losses. Unlike collateral, however, lenders can also secure an asset-based loan with the company’s accounts receivable, inventory, or business equipment.
What to Expect with Asset-Based Lending
Cash flow crunches are a common problem experienced by small business owners, especially those who have recently launched a company. For those with little previous credit history, obtaining a traditional bank loan to meet payroll and other expenses can be challenging. Asset-based lending makes it possible for more business borrowers to obtain funds because it significantly decreases the risk faced by lenders.
Types of Collateral Preferred by Lenders
Because many lenders consider physical collateral riskier than other forms, the terms and interest rate a lender might offer you with this type of asset-based lending could be higher than if you had pledged something like bond or securities. The reason for this is that it’s easier for lenders to convert the latter to quick cash than it is for them to attempt to sell an asset belonging to the borrower.
In addition to the type of asset offered, other factors that affect interest rates and terms include how long the applicant has been in business, credit history, and current cash flow situation. If you’re considering an asset-based loan or would like to investigate other forms of alternative financing, we invite you to contact Norris Commercial Capital today to request a consultation.