Asset-based lending is a type of loan where the lender (LandMark Funding) opens a line of credit for the borrower, and the borrower puts up collateral in exchange. The amount of funding depends on a few factors, but a major factor is the value of the collateral, as well as the performance history and financials of the company requesting the funds.
Asset-based loans commonly take the form of a line of credit, and a company can increase its credit availability with pledged assets in accounts receivable and inventory. Companies may be able to finance anywhere from 75% to 85% of their commercial accounts receivable. Inventory and equipment usually see a borrowing base of around 50%. The borrowing base can change regularly when accounts receivable increase or decrease.
What are the Benefits of Asset-Based Financing?
Deciding on a type of financing means understanding each available type and how that type may or may not benefit a particular business.
Some of the reasons a company may want to speak with asset-based lenders include:
- The liquidity of the company increases.
- The funds can be used for virtually anything.
- Asset-based financing is fast with quick dispersal.
- The overall cost is low compared to other options.
Some of the reasons a company may utilize asset-based lending include corporate acquisitions, leveraged buyouts, and the spending flexibility. Additionally, turnaround situations and working capital enhancement may encourage a company to look into asset-based financing.
Asset-based lending is also a type of financing that’s open to virtually any industry including technology, logistics, the oil & gas industry, and manufacturing. Other industries served by asset-based lending institutions include distributors, wholesalers, and resellers.
How Can a Company Qualify for Asset-Based Lending?
Like any financing type, asset-based lending does have some qualification criteria that must be met. Although there are some qualifications a business must meet, it’s still a type of financing that’s easier to get than a traditional loan, much like accounts receivable factoring.
Some of the criteria that may be required for asset-based financing include:
- A well-established client base.
- No liens on the company’s accounts receivable.
- A minimum monthly line of at least $700,000 (varies).
- No overdue taxes.
It’s helpful to speak with lenders when there are questions about qualification. Sometimes it’s possible to secure an asset-based financing line of credit despite a blemish on the company’s credit report.
Additionally, some companies may have other criteria, so it’s important to note that this list isn’t all-inclusive.
Asset-Based Lending Versus Accounts Receivable Factoring
One of the decisions a company might make is whether to choose asset-based lending or accounts receivable financing.
The two options do provide similar benefits, but there are a few differences that may impact a company’s decision to choose one or the other.
- Factoring companies are a great resource for companies who don’t have a significant credit history while established companies might get more money with asset-based loans.
- Factoring finance doesn’t have a limit, and there’s no minimum, either. This flexibility is great for small businesses and startup companies. Asset-based loans, on the other hand, have limits.
- Overall, asset-based lending is usually less expensive than receivables factoring, but cost isn’t the only consideration a business may have when deciding between the two options.
- Customer contact is also different with accounts receivable factoring companies because they interact with clients, and the process of asset-based lending doesn’t usually involve clients.
Any small business or startup company currently researching funding will want to consider factoring finance options, including asset-based lending, because it’s very available to almost all companies with invoicing activity. However, asset-based lending is a viable alternative, too, and it’s a lending type that should be considered while you research your options with LandMark Funding.