Asset-based financing allows your business to obtain a short-term loan by using assets as collateral to obtain cash. Lenders usually look at your accounts receivable, purchase orders, and inventory as assets, but banks may also see your facilities and equipment as assets.
Asset-based lenders may advance up to 90% of the value of the asset to your business. You normally pay back the loan by making installment payments over the term of the loan.
Why Seek Asset-Based Loans for Your Company?
Asset-based financing works for small- to mid-size businesses for a number of reasons, including:
- Qualification doesn’t depend on your business’s credit standing. This loan relies on the creditworthiness of your customers.
- Lenders may approve your asset-based loan within days as opposed to the weeks or months typical of traditional bank loans.
- Asset-based loans don’t require your personal assets for collateral.
- Your company keeps cash flowing in the business while using the lender’s money to cover immediate costs.
How Asset-Based Financing Works
Imagine your accounts receivable has $100,000 of value. You want to expand your market into other areas by ramping up production, hiring a few employees, and purchasing equipment. You lack the extra financing to accomplish this goal, so you look to an asset-based loan for help. A lender can look at your ability to collect on your accounts receivable payments as a way to give you as much as $90,000 to grow your business.
Metrics That Influence Asset-Based Financing Lenders
Because asset-based lending works with your accounts receivable, a lender may examine your receivable turnover ratio, days sales outstanding, or your collections effectiveness index. The receivables turnover ratio gauges how many times in a year you collect your average accounts receivable. Days sales outstanding gives you insight into how long it takes you to collect on invoices. The collections effectiveness index reveals the percentage of your accounts receivable you collected in one year.
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