Some businesses find that traditional loans aren’t the right fit for their needs. Seasonal businesses, companies undergoing major transitions and other companies that experience uneven cash flows can all benefit from alternative lending options, such as asset-based financing. Here are four things you should know about this type of financing.
- The Focus Is on Asset Value
Asset-based financing, also called asset-based lending, focuses on the assets your company possesses and their value. Traditional loans, by contrast, focus on financial ratios, such as the company’s total profits and losses. When your financing is based on asset value, you may gain access to more flexible rates and benefits related to special types of assets.
- You Need To Take Certain Things into Consideration
If you’re considering asset-based lending (ABL), there are certain things you must consider. You can utilize solid or liquid assets, but your choice may depend on factors such as term length, timing and the total value of each type of asset at your disposal. You should also consider time sensitivity and whether you need other loans or financing options in addition to your ABL.
- Lenders and Borrowers Weigh Costs and Benefits
The primary data potential ABL borrowers weigh are costs and benefits. The potential cost your business faces during a transition or the off-season, for example, may be the deciding factor in choosing ABL to cover costs. You should also consider costs associated with paying off the loan, such as interest rates. Compare those potential costs to benefits related to ABL, such as flexibility, faster approval times and support for growth and profitability. Your lender will also weigh costs and benefits, including the risk you and your assets present, before deciding whether to approve your application and how much your loan should be.
- Terms And Conditions Vary
Terms and conditions may vary for a variety of reasons no matter what type of financing you apply for. If you opt for ABL, the number and total value of assets you provide have the largest influence on the terms and conditions. Other variables include your credit history, the age of your business, your business’s cash flow and the amount of risk you present as a borrower.
ABL is a good option for small and medium-sized businesses. Prioritize liquid assets, such as accounts receivables, if possible. If you are approved for an ABL, use it for short-term coverage for your cash flow.
