Should You Consider An Asset-Based Loan?

You may use short-term assets like inventory or accounts receivable as collateral for commercial loans to generate working capital or meet immediate short-term cash needs. Short-term funding can also be accessed by personal assets such as insurance policies. Small companies may use short-term assets as leverage for commercial loans to raise working capital or meet immediate short-term cash needs.

Asset-based lending (ABL) is a form of alternative funding that is structured as a loan or a line of credit and is secured by the assets of the business. Asset-based lending can be used to supplement working capital and fund business growth since business owners may obtain an asset-based loan by using current assets or assets they plan to buy as collateral. It is a regular practice in both local and international financing sectors.

The most popular form of asset-based financing is invoice financing. It's about existing assets, such as a company's receivables. There are two major types of invoice financing: Factoring – When a factor advances a percentage of the value of your unpaid invoices to your business, it is known as invoice factoring. Your ledger is taken over by the factor, who chases and processes payments. As a result, the clients will be aware that you are using finance. Invoice Discounting – is similar to invoice discounting, but you maintain power and accountability over the ledger and payment collection.+

Advantages of asset finance

1. Cash flow benefits for the lessee.
The lessee's operating cash flow is likely to be higher than it would be under a traditional loan arrangement because the lessee would be able to profit from the asset's use without having to make a substantial capital investment upfront to buy it. The lessee will pay for the asset out of the income it receives when running it. The asset's expense would be more evenly distributed over its useful economic existence, with lower lease payments, which will help the lessee's cash flow.

2. Tax advantages.
The lessor will buy the asset and will be eligible for capital allowances on this purchase. Furthermore, the lessee will benefit from this savings because it will be passed on to them in the form of lower monthly rental rates.

3. Improved security position for the finance provider.
The finance provider would have a greater security advantage in an asset finance deal than in a traditional loan arrangement since it will be the legal owner of the asset rather than just a charge holder. They are more likely to have more flexible financing mechanisms and, possibly, higher levels of funding to the lessee as a result of their stronger security status.

4. It can be easier to qualify for asset-based lending.
Asset-based lenders are more likely to look beyond a shaky financial history and poor credit if a company has a good pool of assets to draw from when assets are pledged as collateral. Asset-based lending appeals to many business owners because it allows you to invest the money wherever you want. Unlike conventional loans, which must be used for a particular reason, asset-based lending may be used for anything as long as it counts as a business expense.

Cons of Asset-Based Lending

1. The setup processes can cause missed opportunities.
Before any funds are released, registering fixed assets as collateral can be a lengthy process. These delays can put a company at risk of losing out on lucrative opportunities.

2. There can be high levels of monitoring and disclosure.
The value of physical assets fluctuates daily. As a result, asset-based lenders that lend money against fixed assets often involve comprehensive reporting in addition to the standard financial reporting required for other forms of finance.

3. Low credit value from certain assets.
If you want to borrow against fixed assets, the credit available will be less than 50% of the inventory or equipment's perceived value. This is because these properties are often liquidated or auctioned for the investor to recoup its investment.

4. Assets must be clear of any liabilities.
Before entering into an asset-based loan arrangement, the company must resolve any accounting, tax, or legal problems. This is because they will have an impact on the lender's ability to protect and sell the properties in the event of a default.

5. High costs.
The loan's cost will fluctuate, which means the interest rate may be much higher than expected. Additional costs, such as assessments and due diligence fees, are also associated with asset-based loans.

6. The level of credit can reduce unexpectedly.
Since available credit is almost exclusively based on the perceived value of the assets in question (including customer invoices), if the liquidity contracts, the amount of funding available decreases. This means that the borrowing base might unexpectedly shrink due to an unexpected occurrence, such as a major customer's insolvency. In contrast, if the value of your collateral rises, your loan limits are unlikely to rise with it. Consequently, the assets could be collateralized at a lower value than their real value.
Hakim Saya is a boutique Business Finance Consulting firm based in San Francisco, California. We assist domestic and international companies in getting Access To Capital. We help companies and organizations increase profits as much as 100 - 300% and reduce costs performance based by 28% using AI. We also support cross-border relations between the US and Asia (outside of China).
We are proud members of the global community, helping to support and grow local and international companies by providing unique and creative solutions to our clients. We utilize our national and international network of direct lenders to offer financing options that meet our client's specific needs.--