How Does Asset Based Financing Work?
When a bank decides to give a company funding, what they are really doing is giving the business asset based funding. Almost all loans, advances, financing are asset-based. Even if you choose an unsecured business loan, the bank is looking at your business overall as an asset. Ultimately, lenders do not want to collect on collateral unless they need to. As a result, they are betting on you and your assets. Asset based financing for businesses ultimately means funding based on your accounts receivable or inventory that can be used as collateral.
Whenever you take a loan out you are putting your business on the line. Both lenders and borrowers are taking a risk. Lenders are concerned the business won’t pay them back. Borrowers are worried what happens if they can’t pay the lender back. Let’s take a moment to break down what asset based lending actually entails.
So What Is Asset Based Financing?
Asset based financing will typically take advantage of your business’s unpaid invoices or accounts receivable. Most asset-based lenders are looking for a secured asset, not a future asset.
Generally, asset based financing lenders and borrowers agree on a specific percentage of the unpaid invoice to get in cash. Often times this is between 70 and 80 percent of the full value of the invoice. The lender is hedging their risk by not giving a larger percentage. In some cases depending on a number of factors, a borrower might be able to receive close to 90%.
Factors That Can Help Determine The Amount Of Cash You Receive Include:
- Age of the Invoice
- Newer invoices will receive a higher value.
- Credibility of the Client
- Depending on who the client is that owes the money for the invoice can help or hurt the value you can receive from an asset-based lender.
Pros: This type of funding will give your company access to funding quickly so that you can move on with running your daily operations. It is much simpler than a traditional bank loan to apply for and can get your business to the next level.
Cons: Lenders are going to dig through your accounts receivable to find your best ones. They are going to look for a quick return on their lending as well. Your invoices with less than 60 days left to pay are going to be the ones that will appeal to the most lenders. Because of the risk associated with this kind of funding, you can lose out on a large percentage of your cash flow.
Because business asset based lending is risky to companies it can make some businesses nervous. They also will cost more than traditional financing from a bank. Depending on your lender the interest rate can vary. Often times you can expect to have your clients pay your lender directly instead of the money running through you and then to the lender. Often times this is an uncomfortable situation to owners who no longer control their own business’ finances. Especially if you continue to use asset-based lending. For this reason, you may want to look at other funding and financing options out there, like merchant cash advances.
Asset Based Alternatives
eBusiness Funding helps businesses that may struggle with traditional lenders. To do this, we provide merchant cash advances that are accessible to a wider spread of businesses than bank loans or private lenders. 95% of businesses that meet our simple requirements qualify for funding. All you need is to be in business for at least six months, with over $10,000 in monthly revenue. With us, it’s not about past credit history or collateral, but about your business’s potential.
It’s important to us that you use the funds we offer in the most helpful way possible, so we place no restrictions on how you spend our advances. Payroll, expansion, repairs, spend on what you need! We also get you your funds fast, sometimes as soon as 72 hours after you first apply. Repayment is also very simple. Rather than large monthly payments, we take an established percentage of your future sales. This is set up by our skilled consultants. This percentage stays the same, so if business slows down, you pay less.
Interested? You can begin right now by filling out this simple contact form. We’ll be waiting, and look forward to helping your business get the funding support it needs.