Traditional Lending vs. Asset-Based Lending
When it comes to business loans, there are a couple of routes you can follow: traditional lending and asset-based lending. The best option for you will depend on several different factors.
Here are a few steps you can take to determine the right path for your business.
Examine Your Financial History
How long have you been in this business? What is your credit score? A profitable, well-established business is usually in a better position for receiving a traditional business loan. An entrepreneur with a shorter history or a less-than-perfect credit score may have better luck with an asset-based loan.
Look at Your Future and Determine Your Needs
What is your projected financial growth? If you have a young, rapidly-growing company and receiving approval for a traditional loan isn’t happening, asset-based loans may help.
Why do you need the loan? Traditional loans typically have more restrictions regarding what can be done with the funds. Asset-based loans function as lines of credit, and you can use these loans for multiple uses.
How quickly do you need funding? Asset-based lending can be involved and time-consuming. These loans require lots of paperwork, visits from auditors to evaluate your assets on-site, and time to process. If you need funds quickly and meet the criteria, traditional loans may be the way to go.
Evaluate Your Assets
Asset-based lenders are focused on the tangible assets you have on your balance sheets. These assets become collateral, which allows the lender to seize these assets in the event that you are unable to pay back your loan. Though this sounds risky, one notable perk of this is that the security your assets provide to the lender means you may have an easier time qualifying for an asset-based loan rather than a traditional one.
Traditional lenders look at collateral as well, and they may even require you to offer personal property to use as security for loan repayment, such as your family home or vehicles. There is much less personal risk with asset-based loans.
So, examine your balance sheets. Any income (such as accounts receivable) and anything that can be sold for cash (stocked inventory, equipment, machinery, paid-for real estate, and pretty much anything else tangible that is valuable) may be considered an asset. Just make sure that you own these assets outright. If you have outstanding debts, other lenders will have rights to repossess the property first, and the asset-based lender needs to be able to seize your assets if you default on your loan.
Only you can decide if traditional or asset-based lending is right for you. Take some time to evaluate your business’s situation before you begin the application process for either.