When you run a company, you hear the words “business” and “loans” used together quite often. In fact, it seems that you can’t have one without having the other – especially if you’re a startup or a small business owner.
With so many lending options to choose from, it can get to be a little confusing trying to pick the one that’s right for your company needs. However, there is one option that’s quite unique compared to the others: asset-based lending.
Asset-based financing has a multitude of benefits that many businesses enjoy using. Like with any plan, though, there are some drawbacks that may hinder your company progress.
So how can you be sure that this is the right one for you?
Don’t worry. We’ve laid out the pros and cons in this article to help you understand how this loan can affect your business. Read on to decide if lending from asset-based financing companies is the way to go for you.
Asset Based Lending (ABL): How It Works
Before you can decide if asset-based financing is right for your business, you need to know how it works.
ABL is great for all companies, from startups to business giants. It’s normally used when a business wants to expand but needs more finances to do so, or when they need more working capital to keep business moving.
Asset-based financing is when a company takes its assets (itself) and uses them as collateral for a loan. These assets usually involve accounts receivable, but they can also involve equipment, real estate, or other inventory.
This loan is a fast-paced loan for those who need cash quickly in order to grow. After you pay your loan back in full, your assets cease being collateral and are fully returned to you.
The Pros and Cons
As great as this loan sounds on paper, there are other things that need to be looked into before fully committing to that loan. Here’s a list of some of the pros and cons that come with lending from asset-based financing companies.
Pro #1: You Still Have Ownership of Your Equipment
This is perhaps the best part of the loan. Many lenders will ask to have something they can call theirs, even temporarily (like a title) before they decide to give you money in return.
With an asset-based loan, the lending company will gain collateral in the event they should need it in case you don’t pay up. However, they do not physically take any of your business assets while you are in good standing with them.
This means that your name still stays on your assets as long as you continue to pay back the loan in good time, and you can continue business as usual without having to go through red tape or answering to the lenders first.
Con #1: They Cost a Good Deal to Pay Back
Its no secret in the lending world that these loans come with a heavy price.
The asset-based lending companies have to make their money somehow, and they make more than their fair share of gains.
The price of the loan is based on the annual percentage rate (APR), which could range anywhere from between 7 and 17 percent. This wide gap makes it difficult to gauge how much you’ll be looking at until they throw the price at you.
The lending companies are also prone to add their own pricing on top of the APR, so they can get a little extra cash – because why not?
Keep this in mind when if you plan on applying for a loan.
Pro#2: It’s an Amazing Choice for Manufacturers and Distributors
Seasons change, and so does the business flow, especially when it comes to manufacturing and distributing companies.
Often enough, working in either one of these company sectors can make things complicated for you. You need a leveraged balance sheet at the end of the year, but your seasonal and industrial needs could make that hard on you.
If you somehow find yourself suffering in the cash flow lane, getting an asset-based loan could be the very answer you need.
Asset-based financing companies can work their magic and get you out of the rut fast, allowing you to keep working hard towards your business goals.
Con #2: The Lending Companies Are Super Particular
From collecting collateral to issuing funds, asset-based financing companies are very particular about what they need from their lenders – and you have to be able to step up to the plate.
Firstly, your company needs to be in good standing with the customers and have impressive accounts receivable. This tells the lenders a good deal about how you do business.
Your assets have to be in good standing as well, and the type of asset you use as well as the current standing of your business (determined by size, finances, etc.) plays a big roll in how much they will lend.
In most cases, it’s also required that your customers send payments directly to the lenders themselves, which can obviously put you in a situation that you don’t want to be in.
Think about these pros and cons before you make the decision you think is best for you.
The Site for All of Your Lending Resource Needs
Now that you know all about asset-based lending, you can make the decision on whether or not it’s right for you. You may also want to learn more ways to help your company reach new levels in the business world.
Luckily for you, we’re here to help.
At Dealstruck, we know a lot about what it takes to run a successful business, and we want to share our advice with you. We have an array of resources, like information for startups, business know-how, advice on technology, and more.
Have a question you’d like to ask us? Want to know more about a specific topic? We’d love to hear from you. Just reach out to us and we’ll be sure to answer any questions you may have. We’ve definitely got you covered.