Asset Based Lending: Asset-based lending is a popular method of funding businesses in the current climate, while this trend shows no sign of abating anytime soon.
Overall, total asset finance new business grew by an impressive 106% year-on-year in May 2021, with this largely driven by an uptick in leasing and hire purchase agreements.
But what exactly is asset based lending or financing, and what core advantages does it offer to business owners?
What is Asset-Based Lending?
In simple terms, asset-based lending is officially categorised as an alternative method of business funding.
More specifically, it enables entrepreneurs to secure a loan against one or more of the assets held by their business. These assets can vary in nature, while the total value of the assets used as collateral will determine the precise amount of cash that can be borrowed.
As we’ve already touched on, this is a secure type of lending, which means that the assets in question can be seized by creditors in instances where businesses default on the loan and fail to maintain their repayments.
What Assets Can I Use for the Purpose of Asset Financing?
You can certainly leverage different types of assets through this type of financing, depending on the nature of your business and its core purpose.
For example, let’s say that you want to access asset-based lending as a service provider. In this case, you could sell your accounts receivable to a third party in order to boost your real-time cash flow, before repaying this short-term debt once clients have settled their outstanding invoices.
The same principle applies to purchase orders, while product-oriented firms can also leverage their inventory and stock holdings to secure a sum of cash in the relevant amount.
More commonly, firms will also leverage more basic and functional assets such as their equipment or commercial premises (so long as they’re owned). These assets can help to secure larger amounts of money, although there’s a higher risk given the integral nature of the assets and the role that they play in the business.
Similarly, you can secure funding against the value of your company’s intellectual property (IP), especially if you’re a particularly innovative brand operating in the technology space.
What are the Advantages of Asset-Based Lending?
One of the main benefits of asset-based lending is that it optimises liquidity, as you can access cash quickly, seamlessly and with the minimum of fuss.
Given the range of assets that can be leveraged, this type of funding is also accessible and affords you control about how you raise cash and the precise amount required.
Because asset-based lending is secured against equipment, property or similarly tangible entities, the cost of borrowing is also cheaper. This is because lenders are able to offset their risk by incorporating collateral, so the amount that you pay back over time will be reduced.
With options such as invoice financing or factoring, you can also take on short-term and manageable levels of debt that don’t encumber the business over an extended period of time.