How Do You Secure an Asset-Based Loan?
A business that has often over-invested may find itself asset-heavy and cash-poor. In such an instance, it’s a good idea to consider leveraging some of that capital as collateral against a loan. There are many assets that can be used as security for asset-based lending.
Accounts Receivable:
Invoice factoring is a type of asset-based loan that uses the value of your current accounts receivable as collateral. In this type of financing, a lender will pay a percentage of the value of your outstanding invoices, and will usually take the task of collection off your hands as well. While factoring will not result in you netting 100% of the value of your outstanding invoices, it does provide you with a lump sum of up to 95% of the overall value, with the remaining value and fees providing the factor’s profit.
Equipment:
Asset-based lending frequently makes use of corporate equipment as leverage for loans. When you finance your business equipment, you obtain items that your business needs but then you can use those same assets as collateral. However, keep in mind that if you default on the payments the lender can repossess your equipment.
Inventory:
Through inventory financing, you can purchase goods that you can put up for sale at a later time. Business inventory that is financed this way can also serve as collateral, similarly to equipment. Also similarly, the inventory can be seized by the lender if full and timely payments are not made.
Real Estate:
In some instances, such as a bridge loan, real estate can serve as collateral. If you purchase a run-down property with intentions to restore and flip it, a lender may offer you a bridge loan using the future value of the rehabilitated property as collateral. This is a lucrative but risky type of venture, as you are gambling with future value where there are lots of variables that may be outside your control. If you own your workspace, you could also consider using your corporate offices and other real estate holdings as collateral for asset-based lending. However, this is another risky proposition, as your building could be forfeited if you defaulted on paying your loans.
Of course, putting up your valuable business assets as collateral for a loan offers a strong incentive on your part to avoid a default. For example, losing your commercial real estate could be disastrous to your firm. Before entering into any loan agreement, you should ensure you have a solid repayment plan in place.
