What is Asset Based Financing: A Guide on What You Should Know

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The statistics show that 82 percent of small businesses fail because of cash flow.

Sometimes your business just needs enough capital to get over a hump. It can be difficult to get an unsecured loan. However, once you have some capital you can often use it as collateral to leverage a loan.

 

 

If you have never been through this process before you may have some questions about the entire process. Asset based financing is not just for large companies, so if you are a small company this can also work for you.

Here are some guidelines you can follow to make sure that you get the best asset-based loan for your needs.

1. Do You Really Need a Loan?

This might sound like common sense but you really need to make sure that you actually need a loan. The only time you should consider using your business assets as collateral is when your business is strapped for cash to keep normal everyday business activities running.

Another good reason is if you need to expand your business and you can’t find the cash to do it then getting this type of loan is a good option. Otherwise, don’t use what you own as collateral on any loan or you may lose everything if you can’t repay what you owe.

2. What Exactly Can You Use as Collateral?

Most lenders will want to use your accounts receivable as collateral. However, don’t panic if you don’t want to use this as collateral.

Many lenders will also let you use the equipment, machinery and even your inventory as collateral for a loan.

3. How Much Money Can You Get?

How much money you can get depends on what you use as collateral. In general, if you use accounts receivables you should be able to get a little bit more than half of the value of the receivables.

If you use your inventory or anything else you, you will most likely end up with half of the value of it.

4. How Much Interest Will You have to Pay?

The amount of interest you will have to pay is dependent on the type of collateral you use. If you use accounts receivables then you will find that the interest rate is lower.

However, if you use equipment or your inventory as collateral then you will find that your interest rate is higher.

The bottom line is that if you want to get a larger sum of money and lower interest rates when applying for asset based financing, lenders are more apt to oblige when you use account receivables as collateral.

A Final Look at How Asset Based Financing Works

If you are having financial challenges then one of your best options is asset based financing. It’s a great way to use what you already have to get where you want to go.

It’s also a lot easier to convince a lender to give you a loan when you are using collateral to secure the loan. This makes it one of the best options if you want to grow your business quickly.

If you would like more helpful tips that will grow your business, please explore more of our website.

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