There are about 33 million small businesses in the United States, according to the U.S. Small Business Administration. With this large number of companies vying for attention in their target market, it makes sense that not all these companies will be successful. Heavy competition can lead to cash flow issues, which is one of the main reasons many brands aren’t able to continue operating.
But there’s a way to keep this from happening to your organization.
Your business may not always have the proper cash flow to be evaluated when taking out a traditional business loan. But that shouldn’t stop you from continuing to grow your company and make big decisions. When you’re in this situation, asset-based lending may provide you with additional liquidity for your business.
Want to know more about this type of loan and how you may benefit from using it? Use this blog as your guide to all things asset-based lending.
For business owners, there are several types of lending options that you can pick from — each having their own pros and cons. While no loan is perfect, there are some that will work better for you than others. Asset-based lending is advantageous for company owners who have more limited traditional financing options.
Asset-based lending is the process of loaning money in an agreement that is secured by physical collateral like inventory, accounts receivable, equipment, or other property owned by your business. This means that, rather than offer a large sum of money as your loan’s backup, you’ll use business possessions instead. This allows organizations to continue doing business without having to put a pause on growth due to a lack of cash flow.
To meet additional liquidity and cash flow requirements without falling behind, your business can get an asset-based loan so you can be granted a loan based on physical assets. The amount of your loan can be worth the value of the assets offered as security.
For example, if your business has a heavy concentration of accounts receivables and inventory as assets, they may be used to meet the liquidity and cash flow needed to bridge the gap until these assets are converted into cash.
Using cash flow lending is a strategic choice for business owners looking to secure a loan to meet short-term business goals as well as set their company up for success down the road. There are several benefits associated with this loan style, including:
Rather than hold off until you can demonstrate the cash flow required for a traditional loan evaluation, asset-based lending will focus more on the business assets conversion cycle with reliance on the underlying collateral for evaluation.
This loan type uses less stringent financial covenant monitoring and is more focused on collateral control (accounts receivables and inventory as primary underlying collateral). Asset-based loans require your business to have proper financial statements, inventory and products that have an existing market, and a good operating history.
Asset-based lending supports business growth by providing funds for expansion, acquisition of new assets, or entry into a new market. By allowing businesses to capitalize on available opportunities without having to wait for a traditional financing solution to be approved, companies can be more competitive in the fast-paced environment many brands are operating in.
With tangible assets like accounts receivable and inventory converted to working capital, a business can boost its liquidity to address immediate financial needs or obligations like bills or invest in income-generating assets like stocks and bonds and other marketable securities.
Compared to more traditional loan methods or alternative financing options like unsecured loans or a credit card, asset-based lending often offers a lower interest rate. That’s because the loan is secured by tangible assets, meaning the lender is generally more willing to extend credit at much lower rates.
As we previously mentioned, no type of financing solution is completely without fault. While asset-based loans are extremely beneficial for a variety of industries, there are a few elements that you should consider before applying:
By using your physical assets as collateral, you risk them being taken away from you if you can’t repay your specific asset-based loan on time. This could put your business at stake and cause financial hardship in the future. But, if you’re able to pay off your loan by the target deadline, this shouldn’t be something you stress out about. Just be vigilant and pay close attention to what’s expected of you when you agree to an asset-based loan.
Asset-based loans typically require the business to provide monthly reports like an accounts receivable report (AR), accounts payable reports (AP), and inventory reports. Periodic 3rd party collateral exams ensure the integrity of the underlying borrowing collateral.
While this style of lending helps businesses have fast access to working capital, it doesn’t necessarily solve the underlying cash flow problem. If your business has fundamental cash flow issues, this style of loan won’t instantly erase them. It’s beneficial to ask your bank for tips and tricks to improve cash flow.
Unsecured lines of credit or term loans are extremely customizable lending options, allowing you to be flexible depending on what your business needs. Asset-based loans are pliable, but they may have stricter terms and covenants which can limit operational flexibility.
Asset-based lending can be used widely by several industries, including manufacturing, staffing, distribution, logistics, transportation, and business services just to name a few.
If your business is interested in securing asset-based lending, you can rely on Cathay Bank to be a trustworthy partner. We can help you fund expansion, take advantage of mergers, and meet operational expenses, depending on your unique requirements. We’ll work with you to customize a financing option that accomplishes your goals and boosts your bottom line.
Contact a Cathay Bank team member to learn about our specialty lending services.
This article does not constitute legal, accounting or other professional advice. Although the information contained herein is intended to be accurate, Cathay Bank does not assume liability for loss or damage due to reliance on such information.