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Is an asset-based loan right for your company?

Your California company has been growing by leaps and bounds, but at this point, you need capital if you're going to continue to thrive. Should you seek new investors? Or would it be better to talk to a lending institution? 

Entrepreneur magazine explains that if your financial statements are in good shape, your inventory is commonly sold and your customers regularly pay their bills, you may want to consider an asset-based loan.

Assets as collateral

Lenders want to know that your company has the means to make good on the loan, but if you did default, they want to be able to recoup their losses. Assets that a lender may accept as collateral on the loan include the following:

  • Inventory
  • Accounts receivable
  • Equipment
  • Machinery
  • Real estate

The funds advanced to you are based on a percentage of the value of the assets that you provide as security for the loan. Typically, this is around 50 percent of your finished inventory, or 70 to 80 percent of the amounts owed to your company.

Considerations

Because the lender is betting on your future revenues, it will want to know that you have the right kind of customers. Not only do the ideal customers pay within 60 days, they are also generally larger companies rather than small businesses or even individuals. The lender will probably also want to examine your customers' credit ratings. Instead of having you pay the loan payments as your customers pay you, the lender may require that the customers send the money to the finance company.

An asset-based loan may have a higher interest rate than a traditional loan, but rates tend to vary widely. There may also be fees. Other possible benefits and disadvantages may apply, depending on your situation. Therefore, this information should not be interpreted as legal advice.

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