What Is Business Asset Based Funding?
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 so they are betting on you and your assets. Business asset based funding ultimately means funding based on your accounts receivable or inventory that can be used as collateral. Even with a merchant cash advance, it is based on the future asset of your daily credit card sales.
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.
So What Is Asset Based Lending?
Business asset based funding 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. That isn’t the case with a merchant cash advance, however.
Generally, business asset based funding 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 To Business Asset Based Lending
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.
Risks To Business Asset Based Lending
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.
There are other options out on the market for you. We mentioned a merchant cash advance at the beginning of this article. With a cash advance, we purchase your future receivables and give you cash today. Repayment is automatically drafted as a percentage of your company’s daily sales until the advance has been paid in full.
For many companies, this is a better option than having a lender sort their receivables and select what they are worth.
If you are interested in this type of funding, give us a call today and we can talk you through our process.