Large corporations and businesses often require both large and small amounts of capital during the initial period of starting their business venture. They also require short-term financing to consistently maintain production in order to meet demand, buy equipment or to increase the inventory. Asset-based lending is one such source of financing or loan offered against an asset, akin to a secured loan. This article provides detailed information about asset-based lending.
Sources of finance
Many banks and financial institutions provide all types of secured and unsecured loans, asset loans, working capital loans, factoring and asset-based loans.
In financing a business, when a company pledges its assets to secure a loan from banks or financial institutions, it is referred to as asset-based loans. Companies with a not-so-perfect credit score opt for asset-based loans at a slightly higher rate of interest than traditional bank loans. The credit records are indicators that a company can qualify for asset-based loans. Common collateral, or "assets" are accounts receivable, inventory etc. against which loans are available. Commercial lending
Commercial funding is the process of loaning money to established entities like a business or partnership. Unlike traditional loan arrangements offered by banks, commercial funding focuses on the cash flow position of the business first. Commercial lending also comprises of a revolving form of credit to handle operational costs and working capital needs. Factoring finance
Fast-growing companies with bad credit scores can procure financing easily through factoring. You sell your accounts receivables to a factoring company for cash. However, this type of financing increases the cost of financing, thereby cutting into the company's profits.
Advantages of asset-based financing
Companies who do not have collateral assets to procure secured loans, can avail asset based loans easily. This makes financing easier and more accessible for small companies who have just begun and require short-term financing for operational costs and working capital requirements. Lower rate of interest
As compared to unsecured loans, the rate of interest on asset based loans are lower. The interest rates are lower as the lender can recoup his money by seizing the assets of the defaulter. As there is a safety net, the risk is lower and hence, the interest rate is lower. Provides more liquidity and flexibility
Asset based funding focuses on collateral and liquidity. As there are less financial agreements, the company is able to increase its liquidity while having the flexibility to invest in the growth and development of the company with sufficient sources of short-term financing. Final word Asset based financing is ideal for start ups and small businesses who are cash-strapped and do not have a very strong credit standing. They are more versatile, cost effective and flexible