Asset based loans have been gaining popularity in recent years. They offer a number of the advantages that you can expect from similar products, such as a line of credit. However, qualifying for an asset based loan is much easier. This article discusses the six most important benefits of asset based loans.
To learn more about asset based loans, read “What is Asset Based Lending?”
1. Improved liquidity
The most important benefit that your company gets from using asset based financing is improved liquidity. When used correctly, the facility can provide you with financial stability and predictable cash flow. This benefit can help stabilize operations for companies that are growing rapidly, have tight cash flows, or have seasonal revenues.
2. Easier to get than loans and lines of credit
Qualifying for an asset based financing program is easier than qualifying for a business loan or line of credit. At the very least, the business needs to have a short track record of profitability and reasonable financial controls. Aside from that, the most important requirement is to have assets that can be leveraged.
The easiest asset to leverage is your accounts receivable. Invoices from creditworthy commercial clients make great collateral because they can easily be turned to cash. Most finance companies prefer to finance invoices that pay within 70 days. Additionally, your company can use inventory, equipment as additional collateral.
3. More flexible than other types of financing
Most asset based financing facilities provide great flexibility. Usually, there are few restrictions on how you can spend the money as long as it is for a business purpose.
The financing line itself is tied to the value of your accounts receivable and other collateral. As a result, the line can increase as your sales grow. Increases can usually be approved quickly. Your company does not need to go through the complete underwriting process again. This benefit is important for companies that are growing quickly and need additional funding.
4. Can be obtained quickly
Companies that meet the qualification criteria can get an asset based loan fairly quickly. The application and underwriting process is much faster than qualifying for a conventional loan or line of credit.
The underwriting process can usually be completed in a couple of weeks – assuming that your business is profitable and has reasonable financial controls. More complex situations, such as turnarounds, may require additional time to underwrite.
5. Fewer covenants
Asset based loans have fewer covenants than conventional lines of credit. Consequently, managing the line and staying in compliance is substantially simpler.
6. Can be used as a stepping-stone to other products
Companies that use asset based lending are usually in an intermediate growth phase. They have outgrown factoring financing lines, but they are not yet able to qualify for a conventional line of credit.
An asset based line allows you to build and improve your track record with a lender, as you work to grow your business further. Once your track record is established and strong enough, you should be able to move to a less expensive solution.
You can learn more about both products by reading “Factoring vs. Asset Based Loans.”
7. Lower costs than comparable solutions
Most asset based loans have lower costs than comparable alternatives, such as factoring. With this obvious advantage, savings drop directly to the bottom line.
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