As a small business owner, you sometimes need additional capital to cover short-term cash flow issues. Asset-based lending is financing in which you secure your loan with assets. Depending on your finance agreement, you can use accounts receivable, equipment, inventory, supplies, marketable securities, or property to back your line of credit. Banks typically prefer liquid collateral for these loans.

What Is the Value of Your Assets?

When you apply for this type of funding, banks focus on the value of the collateral you use to secure your loan. Lenders usually only consider current receivables if you use accounts receivable as collateral. Financial institutions will conduct field examinations to determine the quality of your assets. The bank will perform a third-party appraisal if you use physical assets like equipment, machinery, inventory, or real estate. You can also use intellectual property to back your loan.

What Assets Do Not Qualify?

Some collateral types will not qualify for this lending type. Accounts receivable may not be the best option if your business has extended billing terms or is subject to other delays. Lenders do not usually accept perishable goods or specialized inventory as collateral because they hold limited value.

Are You a Good Candidate?

A wide variety of businesses can qualify for asset-based lending. Many companies have fluctuations in cash flow and require capital to maintain operations, take advantage of opportunities, or expand. If your business is subject to seasonal changes, you may need increased cash flow to get through the slower months. Other factors may affect your revenue, like economic elements out of your control.

Retail companies require sizable inventory to stay operational and can benefit from this lending when low sales or outside factors affect business. Wholesalers and distribution operations often experience seasonal changes in sales, creating gaps between when you must purchase inventory and when you can sell your products. Lines of credit help you cover expenses as needed to maintain adequate inventory.

How Do Banks Determine Your Loan Amount?

Lending companies identify your loan-to-value ratio to determine their risk. This ratio depends on the kind of asset you are using as collateral, as they divide your loan amount by your asset value. Liquid assets typically provide a higher loan-to-value ratio.

What Are the Advantages of Asset-Based Lending?

Borrowing money this way gives you quick access to working capital when cash flow issues arise. These loans usually have lower interest rates than other types and fewer covenants.

When you need money to cover short-term expenses, loans using your assets as collateral offer a good option for your business.