What is an Asset Based Loan?

Businesses of all sizes need to maintain steady cash flow and must have access to funding both in times of growth and times of hardship. As a business owner, you must stay abreast of the financing options available to you at all times.

Asset based loans are one option that can help you access quick funding whether you’re looking to grow, make a large purchase, or simply maintain inventory and payroll. 

What is an Asset Based Loan?

When businesses use what they already own as collateral for securing a loan or a line of credit, that is an asset based loan. The terms and conditions on these loans may vary widely depending on several factors including value, past credit history, and liquidity potential of assets.

Generally, when a business has only illiquid physical assets, loan amounts and even interest rates can be higher to offset the lender’s risk. As a result, these loans are more typical of smaller to mid-sized companies.

Asset Based Loan

What Assets Can Be Used as Leverage?

Any bank or lender will tell you that liquid assets are best. In this type of loan that could mean outstanding invoices. In this case, businesses use accounts receivable as collateral to shorten collection turnover time and access cash quickly.

More often, these loans are backed with illiquid, physical assets. Industry to industry, the types of assets involved can vary. Common examples include inventory, property, or large equipment. When it comes down to it, anything owned free and clear by a business can be used as collateral to obtain funding. 

As with any financing, you’ll need to find the right lending partner for your unique circumstance. Look for banks or other lending bodies that have experience working with your industry and can fairly assess the value of your assets.

Asset based financing can work for any small business that needs to access cash relatively quickly. Whether it is for a large purchase, inventory restocks, or general cash flow needs, you should consider this less conventional route.