Every business person knows that capital is a must to run a business. Business capital has two parts:
own capital and borrowed capital. Own capital acts as a stake to the business, which builds a strong base to the business against business risks and threats. On the other hand, borrowed capital acts as a cushion that drives day to day working of the business. So, it is needless to say that borrowed capital or lending is an integral part of the business. For borrowing, if you are not eligible for a traditional loan, you have another option—asset based lending. Here, you will know all about it.
What is an Asset Based Loan?
When you have adequate fixed assets, and you aren’t qualified for getting a traditional business loan under the US Department of Agriculture (USDA) program, you can avail loan against your tangible fixed assets. The way fuel ultimately works on your car to move via the engine, the loan works the same to your business to move and grow faster. This loan can help you out to find a solution to your business need.
Who is Best Fit for Assets Based Loan?
Small and medium enterprises (SMEs) those particularly working under rural areas with low profile revenue history of business are the best-fit candidates for getting a loan against their fixed assets as they have no access to the loan under the USDA program.
What is the Advantage of Assets Based Loan?
Bankers of the lending institute feel greater comfort to cater loans against tangible assets because the risk weight of asset-based lending is minimum from the lender’s point of view. This is the reason why while approving such loan, the lender allows flexible terms and conditions on loan which is beneficial to the borrower.
Which are the Assets Considered for Assets Based Loan?
Lender prefers real estate, machinery, and equipment, inventory and account receivables for considering approval of loan backed by assets. Since the assets are kept collateralized against the loan approved, the lender can take possession of those assets in case of default in repayment. The lender sells the acquired tangible assets by way of auction, and the proceeds are adjusted against your loan dues.
Why Should You Choose Assets Based Loan?
If you want to grow your business more and have no eligibility to get a loan under the USDA program but have adequate on-balance-sheet collaterals to protect the interest of the lenders, you can opt for an asset-based loan in the following circumstances.
- If you are not stellar – If you have low profitability, low cash flow, low business or personal credit score, don’t worry. Lenders will not focus much on your low business profile because they are concerned about the authenticity and value of the assets that you offer to get the loan. They are more concerned with the viability of loan in terms of the market value of tangible assets to be collateralized against the loan approved.
- If you need cash for your fast-growing business to catch up – When you’re observing that your business is moving at a faster pace and you need further working capital to fuel up for meeting the market demand, you should go for asset-based lending against your book assets. This will not only gear up your business momentum but also gear up the profitability. Infusion of the borrowed fund in your business will increase your sales and generate more cash flow in the long run which in turn generates a sustainable higher profit margin.