So you're ready to launch your own small business! Congratulations! You're living your dream, working for yourself and following your passion!
Small businesses aren't just good for small-business owners either. They're essential for a healthy and vibrant economy as well.
Financing your small business is a whole different story, however. It can be tricky to navigate the complicated legal-ese of financial lending options.
That's why we've compiled the top five asset-based lending options to help get your small business off of the ground!
The Top 4 Asset-Based Lending Options
Starting a small business can seem like a bit of a Catch 22. To get the best small-business loans, you need to already have a thriving business and a strong credit score. How are you supposed to get those things when you're first starting out?
Asset-based financing lets you leverage your existing assets so you can launch your startup before having a million dollars in the bank.
Let's start by looking at how an asset-based loan works.
How Asset-Based Financing Works
An asset-based loan lets you leverage your existing assets to procure a loan. This could include existing capital as well as assets which can be easily liquidated.
Examples of equitable assets include:
- Physical inventory
- Accounts receivable
Asset-based loans are usually offered as asset-based lines of credit. They may be available as Term Loans as well.
Asset-based lenders base the total amount of a loan on the current market value of your assets. This is known as the borrowing base.
Generally speaking, a business-owner may borrow 75 - 85% of your accounts receivable from an asset-based lender. You may also borrow up to 50% of your existing inventory or business equipment.
You'll often need to offer up some additional collateral. This helps lenders know they'll get their money back, no matter what. In the instance your business was to go belly-up, lenders could seize your collateral to recoup their investment.
Considering that you're an uncertain risk, asset-based lenders will consider your assets heavily while underwriting your loan. This might make things seem like a bad deal, for borrowers and business owners. This isn't entirely true.
Your assets essentially serve as a co-signer for your small-business loan. This means you're likely to have a much easier time securing an asset-based loan, even if you don't have a ton of working capital or credit history.
The Most Common Types of Asset-Based Loans
Now that you have a greater understanding of how asset-based loans work, let's look at the most common types of asset-based loans. This will help you pick the right one for your particular business.
Business is unpredictable at the best of times. This unpredictability can be the death knell for small businesses with long invoicing cycles. Small businesses can often run into cash flow shortages if you have to wait longer than 30 days to collect your accounts receivable.
In the case of invoice financing, an asset-based lender will loan you an amount based on your existing invoices.
Invoice financing is similar to invoice factoring, but not exactly the same. In the case of invoice financing, you retain control of your assets. With invoice factoring, your existing invoices are sold to a third party.
If you already have a significant amount of inventory on-hand, inventory financing is a great lending option even if you have less-than-stellar credit. Although inventory-based lending doesn't cover the entire worth of your physical inventory, you'll still receive most of your inventory's value.
Every business needs some kind of equipment to get off of the ground. This can make it difficult to launch your business if you need a piece of equipment that is prohibitively expensive. Equipment financing makes it possible for you to get started while avoiding a prohibitively large up-front expense.
Business Lines Of Credit
Lines of credit are incredibly common for business loans. That's because they're so essential.
It's difficult to imagine how much money you'll need to operate a business at the best of times. That becomes next-to-impossible when you don't even know how much money you'll be bringing in.
Business lines of credit are available when you need them. They're a good idea to have on hand even if you're an established business. Things happen, often out of the blue. Don't let unpredictability derail your life's dream!
How to Apply for an Asset-Based Loan
Now that you have a greater understanding of the different types of asset-based lending out there, you'll have a better idea of how to apply for it.
Even though it's easier to procure, lenders are going to need documentation to ensure their investment. If you're already in business, make sure to bring along invoices, tax returns, and bank statements to let the potential investor know you're a solid investment.
If you're going to be applying for inventory-based lending, a strong inventory management system is incredibly useful. This will let your lenders keep tabs on your current inventory levels to protect their investment.
Potential asset-based lenders will also need to make sure that your existing assets aren't being used as collateral elsewhere. They'll also need to ensure your taxes are in good standing to make sure your inventory won't be seized.
Asset-based lending is a wonderful option for those looking to start or grow a business even without a fortune in the bank. Working for yourself is a dream come true for so many of us. Your dream can become a reality if you're smart and work hard!
Ready to Start Your Dream Career?
Being a small-business owner is incredibly rewarding. It also helps to further the economy and build a better world.
Whether you're looking for asset-based lending or another form of a small business loan, learn more about our company and how we can help you today!