Are you thinking of obtaining an asset-based loan for your business? Are you in the middle of working with your bank to move to their Asset-based lending group? Have you been wondering what asset-based lending is and how it can help your business? There’s plenty to unpack and understand about asset-based lending and this article is meant to provide valuable insight.
What is asset-based lending?
Let’s start with the basic logic behind asset-based lending. This is a practice that has been around for as long as lending has been an industry. It started with a simple advance of money based on a company’s assets. The straightforward thinking for a lender is that if it thinks your company’s assets are worth $100, they will feel comfortable advancing you up to that $100 secured by the company’s assets. The key emphasis being on “up to” a certain amount of a company’s assets.
So, what determines how much of an advance a company receives for its assets? Using the example of a company with $100 worth of assets, how will a lender decide if they should lend a company $50, $75 or $95? The short and unsatisfying answer is that there are a multitude of factors that will determine a lender’s advance rate and the actual cash they provide to their borrowers. To simplify even further, the more liquid a company’s assets, the higher the likelihood that an asset-based lender will provide more cash.
You’ve probably heard the term, it takes money to make money, and while we don’t necessarily believe 100% in this statement there are some fundamental truths to it. Going back to our $100 in assets example. Let’s say the company’s main asset was all in the form of inventory. Your expected advance would be less than a company with