Businesses looking for a quick injection of capital will usually take the conventional route of a standard bank loan. In periods of working capital requirement, the most suitable borrowing option might be an asset-based loan, which can prove an effective source of alternative finance.
Incorporated into the umbrella term ‘asset-based lending’, asset-based loans offer a much more flexible approach to business funding. Unlike traditional bank loans, when the amount offered by the lender is determined by future cash flow projections alone, asset-based loans are calculated according to the value of the assets owned by the business.
Asset-based loans are especially popular for businesses that have been refused traditional bank loans. Their popularity increased rapidly in the years following the banking industry crash of 2008, when many banks became more cautious in their loan approvals.
In terms of benefits, the lure of asset-based loans stems predominantly from the fact that they are not subject to the same lending constraints as traditional loans. For example, many banks will simply not lend to businesses with debt-to-capital ratios of more than 4 to 1. By contrast, asset based lenders are often quite flexible and are thus willing to lend to businesses that are short on capital but have access to valuable assets, which can be used as security against a loan.
Since asset-based loans are not issued on account of a business’ operating performance, but on the quality of the collateral, you can expect to have access to the finance much sooner, enabling you to finance your company as quickly as possible.
For a more in-depth guide on asset-based lending, including a list of their advantages and disadvantages, download the guide below: