An asset-based loan is a way for a small or medium company to acquire funding based on its assets.  This type of loan is typically aimed at small and medium businesses that need more cash to expand or restructure, whether it’s acquiring more dental chairs or offering new services.

Companies often seek this type of financing when a traditional loan is not the best route or is not attainable. The types of assets you can use ordinarily include accounts receivable, inventory, equipment, and real estate.

Lending Criteria

Your business may qualify for asset-based lending, even if it has been turned down for other types of loans, providing its core financials are strong. To qualify, a company normally needs the following:

  • Assets that are marketable and lien-free
  • Stable financial statements
  • Track record of sound billing and collection practices

Loan Benefits

Some reasons to seek this type of financing are easier qualification criteria, less paperwork and the flexibility to use the money as needed.  If your loan is secured with equipment or machinery, you can continue to use the item while it’s securing the loan. If you had to put up cash as a guarantee, you wouldn’t be able to use the cash to run your business.

This type of loan also comes with lower financial ratios, such as working capital and debt-to-worth. It’s also typically processed faster than some other loan types, allowing you to get your increased capital faster. Because business assets are used, you likely won’t need to use your personal valuables as collateral.

Structure and Payments

The amount of the loan is based on a percentage of the value of your assets. It’s often in the form of a revolving line of credit, which can be applied to diverse business needs. When calculating eligibility, invoices can be used for approximately 80 percent of its market value. Equipment and inventory can commonly be used for 30 to 50 percent of their liquidated value. Be aware that the liquidation value may be assessed at less than the market or retail value.

The payments for asset-based lending are generally structured around the income coming into the business. Most loans allow up to 84 months for the account to be settled. This is a more flexible arrangement than what banks offer for typical loans, which usually have substantive monthly payments that aren’t scaled to cash flow.

If your firm has tangible assets, even if it hasn’t been able to obtain other types of loans, consider exploring an asset-based loan. A financial expert can help you assess your situation and further determine if this type of lending would be the right fit.