Asset-Based Line of Credit Explained
Asset-based line of credit allows you to secure a loan in an agreement secured by collateral. The collateral for asset-based loans includes accounts receivable, equipment, inventory, and other properties you own.
How Asset-Based Line of Credit Works
Most businesses require loans to cater to daily cash flow demands. Your business may obtain asset-based credit to cover payroll expenses even if there are delays in payments. The lender will only disburse the funds if your company has adequate cash assets or cash flow to cover the loan. The interest rates on asset-based credit vary depending on your cash flow, credit history, and the duration you’ve been in business.
How to Qualify
If you want to secure an asset-based credit, your business must possess a trading history and assets to increase your chances of securing the loan. Your business should have accurate and detailed financial statements detailing your financial history, including your trading history, financial performance, and the type and value of assets you possess. If you’re using inventory or stock as security for the loan, you must show how you’ve sold it as it proves you have consistent cash flows in your business.
Assets Used As Collateral to Secure the Loan
Most businesses hold assets they can utilize as collateral to secure asset-based credit. Some of the assets used as collateral include:
Real estate serves as collateral when seeking a bridge loan. You can purchase a dilapidated property secured by the future renovated property. The lender can repossess your redeveloped property if you default on the loan.
Equipment financing gives your business the equipment it requires and utilizes the same equipment as collateral. The lender may repossess the equipment if you fail to make payments against the equipment. Equipment financing differs from equipment leasing as there are no interest and related fees.
Pros of Asset-Based Lending
- They are easier to obtain: The most apparent benefit of asset-based credit is that it’s easier to secure even if you have low business or personal credit. Securing asset-based credit is more straightforward than securing a bank loan which requires significant financial history, a good credit score, and a healthy debt-to-income ratio.
- Quick approval rate: Asset-based loans are funded and approved faster than traditional loans from credit unions and banks. Asset-based credits provide financing much quicker than other lending options and are essential for ramped-up production and sudden expansions.
Asset-based loans are based on the company’s financial circumstances and underlying collateral. Asset-based loans are an excellent deal due to lower interest rates than unsecured loans. Contact a financial expert from Atlas Capital Solutions to secure commercial financing for your business.