How to make asset-based lending work for your business

How to make asset-based lending work for your business

by Justin Hatch, VP Commercial Finance

Across many different industries and with businesses of all sizes and amounts of time in operation, the need to occasionally borrow funds from a trusted lender is especially common. Whether it's getting the money required for a critical expansion plan or addressing an urgent need, business lending is a constant in the modern economy.

Asset-based lending is a unique way to leverage more of your company's available resources to secure the funding you need to grow and prosper. Let's look at the concepts that make asset-based lending an attractive decision and how to best use it to better position your organization for success.

What is asset-based lending?

Asset-based lending is, in many ways, very similar to other types of business loans. Your company finds a reputable financial institution to partner with, goes through the approval process, agrees on terms and conditions, receives funding and promises to pay back the amount provided, plus interest. What makes asset-based lending different is offering some form of equipment, income or other resource as a way to secure the loan in a worst-case scenario where a business can't pay it back. That sounds like a beneficial arrangement for the lender, of course, but what does asset-based lending bring to the table for the companies that use it?

Because your company uses an asset to secure the loan, your lender can go beyond the standard practice of only considering certain indicators - such as cash flow and balance sheet - to provide funding. With other resources like your accounts receivable invoices, inventory and some types of equipment and machinery involved, your organization can secure a loan that might otherwise be out of reach. For businesses that need funding, whether to act on a growth opportunity or to stabilize and begin moving forward, this is a crucial consideration.

With the unique benefits of asset-based lending clear, let's look at how to best leverage it for your specific needs.

How can your business get the most out of asset-based lending?

One aspect to consider in terms of asset-based lending is the liquidity of the resource you will put up as collateral. In other words, you should consider how easy it is to convert an asset to cash. Circumstances differ from bank to bank and business to business, but a strong lender will have honest, open discussions with you about what they will provide in return for a specific asset that's offered up in return for a loan.

If you're confident that you can pay back a loan - a vital consideration whenever you seek out a financial agreement with a lender - asset-based lending offers a specific benefit that can help you manage that process in the long term. Lenders frequently offer lower, and therefore more attractive, interest rates for asset-based loans as compared to unsecured loans, as Investopedia pointed out. A reduced interest rate simply makes the loan more financially manageable.

Asset-based lending also means you can choose the asset that is the right fit for the size of the loan you need, as long as your financial institution will accept them as collateral. You may only need to put up part of your inventory or accounts receivable invoices, which can make the decision much easier from a risk-management perspective. Instead of putting everything on the line in return for a loan, you can pick and choose the collateral.

Of course, finding the right institution to partner with for asset-based lending - and a variety of other banking needs - is a central consideration. TAB Bank has more than 20 years of experience working with businesses just like yours. We value strong relationships and consistent contact with the companies that partner with us. To learn more about what sets TAB Bank apart and  our approach to asset-based lending, get in touch with us today.

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