What are the Alternatives to Asset-Based Loans?
Matthew Gillman
Limited access to capital is often one of the roadblocks that many business owners run into when running a business. There are infinite opportunities out there, and you never know which one will be your big break. The only problem is that, in reality, your cash flow is limited. How do you keep growing your small business when your capital is limited? Thankfully, asset-based loans are here to give you what you need.
An asset-based loan, initially, was a tool that the middle market and large corporations used. However, since many lenders have started to offer asset-based lending, small business owners find this resource as an answer to their problems. In this article, we are going to answer three common questions small business owners frequently ask about in asset-based financing.
Related: 4 Ways You Can Use an Asset-Based Loan
What are Asset-Based Loans?
Asset-based loans are structured based on the collateral available for a lender to lend against. Entrepreneurs can use inventory, equipment, accounts receivable and other assets to acquire an asset-based loan that will improve working capital. Every business needs financing, and an asset-based loan can be the ideal solution.
New business owners frequently run into barriers when applying for loans because of credit, cash flow, or limited operation history. With an asset-based loan, your fast growing small business can obtain loans based on collateral, rather than on credit. This type of financing is secured which means you can secure low-interest rates and better loan terms.
What are Alternatives to Asset-Based Loans?
The downside is, asset-based loans are not for every small business. Certain restrictions determine which businesses qualify and which ones don’t. Additionally, some work needs to be done to keep the lender up-to-date on your company’s financials.
If your asset-based loan is based on accounts receivables and inventory, you will need to provide monthly or quarterly information for a lender. This helps make sure they always have sufficient collateral coverage. If the small business doesn’t have quality assets that qualify them, or you are interested in other options, here are some alternatives to asset-based funding:
Factoring
Factoring is a good option when you want to use your receivables as a way to obtain immediate working capital. However, you must understand that factoring is not the same as a loan, as it involves the sale of your receivables. For small business owners, this means an immediate cash injection based on the outstanding accounts receivable.
Moreover, factoring companies handle the repayment of clients. So, some may inform clients about the factoring, but others offer confidential factoring lines. This saves you from interacting with your client about the transaction. Another advantage of it is that you won’t have to worry about payment chasing, especially if your resources are limited. You get the cash you need and you can use it for business investments.
Related: 4 Questions You Need to Ask Potential Factoring Companies
Inventory Financing
Inventory financing is another option for small businesses to consider. In this case, you use your business’ inventory in obtaining financing. Your inventory will act as the collateral. In this way, you will be able to increase your working capital to buy more inventory or for other expenses.
However, inventory financing is usually funded at lower than market value, with this number averaging around the 50% mark of forced liquidation. Due to this risk, inventory financing often ends up being more expensive than alternative options.
Equipment Loans
Equipment financing offers liquidity. You can obtain much-needed machinery or equipment to improve your business’ efficiency without having to break the bank. Equipment loans for small businesses are often set up as term loans, getting your capital which can finance your growth.
The best part is, you won’t have to present collateral since the equipment bought with the financing will serve as the guarantee for the loan. As long as you can maintain the monthly payments, you won’t have a problem obtaining equipment financing.
Are Asset-Based Loans right for My Business?
When considering any type of business loan, it’s important to consider flexibility and risk when you review the terms. When it comes to funding a small business, many have found asset-based lending to be the best option. Leveraging assets that are available on your balance is a great way to improve your current and cash flow needs.
One of the biggest advantages of asset-based loans is lower interest rates. Because the lenders receive sufficient collateral, interest rates on asset-based loans are often lower than traditional loans. For a small business owner, these monthly savings can make an enormous difference.
Asset-based lending is a great way to secure capital to expand and give your business the best chance for success. If your small business is growing quickly, an asset-based loan might be the best option for financing. Consider an asset-based loan to finance your small business today.
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