Asset-based financing can provide a way for cash-strapped companies to get the operating capital they need, even if their credit is less than perfect. Any kind of business loan or credit line secured by an asset can be considered asset-based financing, whether it is secured by real estate, machinery, accounts receivable, intellectual property, or something else. If the borrower fails to repay, the lender can take ownership of the asset, which makes it less of a risk to the lender than an unsecured loan.
- Can be secured by many types of assets
- Provides the cash flow many businesses need
- Can be set up quickly and easily
- Can be customized to fit your needs
When is asset-based financing needed?
Start-up companies with no credit history may find it difficult to get a loan without pledging the personal assets of the owners. Growing companies that have had credit problems in the past may also use asset-based financing to help them get back on the right track and re-establish their credit. Asset-based financing is one way for any company to quickly take care of cash flow problems.
What are its advantages?
The application process is usually fast and easy because it doesn’t depend on lengthy credit reports and financial covenants. Loans can be custom-tailored to fit your business needs. With a credit line that is based on your assets, you pay interest only on the funds you have drawn, and you still own the assets while you are using them as collateral.
Are there any drawbacks?
Rates for asset-based loans are generally higher than for traditional loans, but rates are negotiable, and depend on your credit history, your total banking relationship with the lender, and whether your assets are liquid (easily converted to cash). As with any secured loan, there is the risk of losing your assets if you fail to repay, so you should consult a trusted financial professional before taking any action.
The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank, a division of ZB, N.A. Member FDIC