Asset-Based or Traditional Funding: Which is Right for You?
Whether you are looking to grow your business or you simply want to get past a short-term cash crunch, you have probably explored a number of options for securing financing. In your research, you’ve probably encountered asset based lenders in additional to traditional banks, but may be wondering which option is right for your business.
Read more to find out about the two types of financing, and explore which will work better for your business circumstances below:
Asset Based Lending
In the simplest terms, asset based lending is a loan that is based primarily on the assets that the business has, such as accounts receivable, inventory, equipment or real estate. Those assets are used as collateral for the loan. For example, in one common type of asset loan, the accounts receivable loan, a company will sell their outstanding invoices to the lender for between 70 to 90 percent of their value; in return, they get a line of credit to borrow against for specific expenses, and the payments on the invoices go toward paying back that line of credit. In general, an asset-based line of credit like this operates on a three year contract, and every dollar that is paid by customers toward the invoices equals another dollar available in the credit line.
Asset-based lending is ideal for businesses or business owners who have less than perfect credit, unpredictable income, or a short history. Those who do have credit issues will face some restrictions on their loans, and more requirements for reporting, but the loans are generally easier to acquire.
However, like any loan, an asset based loan does come with costs – if you choose to sell accounts receivables, for example, you will not earn the same full amount that you would if you accepted payment yourself – and is not ideal for financing construction, real estate or prolonged expansion.
Traditional Bank Loans
When a business applies for traditional financing from a bank, the requirements are often more stringent than asset based loans. Rather than being guaranteed by assets used as collateral, eligibility for a traditional loan is generally determined by the projected income of the business over the life of the loan. For an established business with a good track record of earnings —and good credit –a traditional loan is generally easy to acquire.
In addition, while businesses can generally get larger amounts from traditional banks, the funds from traditional banks generally come with more restrictions and covenants than those from asset based lenders.
Only you can decide which type of financing is best for your business. Talk with your financial advisors, read all of the information about the loans and compare the costs and benefits for your business – and get the money you need.