Asset based lending is one of the fastest growing forms of business finance in the United Kingdom.
It is almost unavoidable that, at some point, your business will need some funding that beats your lines of credit. In the majority of cases, this need relates to one of those periodic spurts of development that many businesses experience. For instance, perhaps you have doubled down on scaling your business’s activities over the past year. Everything reached a critical mass in the previous year; now you must accomplish twice or even three times the number of orders you did three months ago. If your business hasn’t breached steady profitability or is new, good luck acquiring a small business loan.
Especially if you are a small business owner, you will find it difficult to secure a business loan, as banks are notoriously conservative about sanctioning loans to new and small business owners.
This is where asset based lending comes into the play. You can typically use your company’s physical assets as collateral for lending. Assets like property, machinery, equipment, stock, and debtors can all be used as security for lending.
In this post, we will discuss everything you need to know about asset based lending, including its benefits and how it could work for your business.
What is asset based lending?
Asset based lending is a specific type of lending rather than a general category such as asset finance. That is, you get an asset-based loan that is closely tied to your assets. Asset based lending is excellent for all businesses, from start-ups to industry giants. It is normally used when you want to expand your business but need more finances to do so, or when you need more working capital to keep your business moving. It works in such a way that you use your company’s assets as security against lending. Those assets typically involve accounts receivable, but they also involve real estate, equipment and machinery, or any other inventory. In some cases, it can also include intangible assets such as intellectual property (IP). Taken in the round, this provides a borrowing base against which you can drawdown as required.
The number of businesses in the United Kingdom using asset based lending has increased by almost a third in the last two months. It has long been popular with larger firms, but easy accessibility is making it a viable option for smaller businesses as well.
Since asset-based funding is secured against your assets, it is highly competitive with other forms of business finance and is affordable as well.
What types of businesses can benefit from asset based lending?
Asset based lending is an excellent option for service and manufacturing-based businesses with a need for stabilising their cash flow and requiring lump sums to pay regular business expenditures such as manufacturing process and payroll. Securing an asset-based loan is comparatively easy if your company has good reporting systems, good financial statements, commonly sold inventory, and customers with a track record of paying their bills. It is a much-needed source of capital for businesses that are highly leveraged, rapidly growing, and amid a turnaround. Sometimes a business requires that influx of cash to prevent growth from stalling or to survive a financial hump. Asset-based loans are well-suited for service companies, distributors, and manufacturers with a leveraged balance sheet whose industry cycles and seasonal needs often impede their cash flow. On the other hand, asset based lending is useful in financing acquisitions as well.
What are the benefits of asset based lending?
Asset based lending has a number of benefits that makes it appealing to businesses that need financing. Some of them include:
- Cash Flow – Improve cash flow by leveraging unencumbered (untapped) assets.
- Stability – Repayments and agreement lengths can be fixed ensuring that you only pay a certain amount for a specific interval.
- Options – You can use different forms of finance in conjunction with asset based lending.
- Control – You still have the ownership of your assets. The lending company will only gain security in the event you don’t keep up with your repayments. However, they don’t physically take any of your assets as long as you are in good standing with them.
- Diverse- You can get a loan against any of your business assets that aren’t generally considered by traditional lenders.
- Quick- If you meet the criteria, it could take as little as four weeks to pass the loan application process.
- Flexible – There are few restrictions on how you spend the money as long as it is for business purposes.
What are the risks associated with asset based lending?
- In the event of a default, the lender may take hold of the asset and sell it to retain the loaned amount.
- If you attempt to pay off the loan early or default on your payments, you may be faced with charges. Late payments also decrease your credit score.
- Asset-based lenders conduct due diligence and credit checks to determine your eligibility. A hard credit check will show on your credit report, which may affect your credit rating.
Are you eligible for asset based lending?
Whether you are eligibility for asset based lending will depend on the following factors, amongst others but may vary from lender to lender.
- Are you an established business with assets and a trading history? Without a trading history and assets, the lenders will not provide the facility.
- Do you stock commonly sold inventory? If you are using inventory or stock as security for lending, you need to show that it is sellable.
- Do you have accurate and detailed financial statements covering your transaction history? Lenders determine whether to sanction the loan amount based on your financial performance, the type and value of assets held, and your trading history.
- Do you have assets of value on your balance sheet? The value of your assets reflects the amount you are eligible for.
Asset based lending is a viable option if you are looking to expand your business interventions. However, you need to make sure that the assets you boast are worth putting up as security for lending.