It can be challenging for small businesses to secure a traditional bank loan. Even if you qualify, it can take weeks to work through the long list of requirements. Let’s explore why asset-based lending is a viable alternative to traditional business loans as well as some of the advantages.
What Is Asset-Based Lending?
Asset-based loans are loans secured by assets like machinery, inventory, accounts receivable (unpaid invoices), and other collateral. Businesses typically borrow a portion of the collateral’s worth and pay it back in installments like other loans. Often, asset-based loans are in the form of a revolving line of credit, much like a credit card, but you can also take out a lump sum loan with a traditional repayment schedule.
Advantages of Asset-Based Lending
Asset-based lending offers many attractive benefits to small businesses. Let’s dive into a few of the most significant.
Improved Cash Flow
An asset-based loan can give you access to increased cash flow. You are essentially turning an asset’s equity into cash that you can use for immediate operating expenses. These loans offer significant advantages to businesses that manage tight cash flows, seasonal revenue, and other situations that make the timing of receiving your money unpredictable.
Business owners often have an easier time qualifying for an asset-based loan than they do qualifying for a traditional business loan or line of credit. There are two primary qualifications lenders will examine:
- Profit margin
- Collateral value
One of the most straightforward assets to leverage are your unpaid invoices. An invoice factoring company can turn your accounts receivable (unpaid invoices) into cash. Under an invoice factoring arrangement, the factoring company purchases some (or all) of your invoices for a small fee and then TXP collects the invoice from your customer. This process allows you to get paid on invoices immediately rather than waiting for your customer to pay in their normal course of business.
It’s also common to borrow against inventory and company-owned machinery or equipment, which can be done similarly to invoice factoring but requires frequent value assessments due to changes in the value of the collateral.
Unlike many traditional business loans, you can use the money you borrow through an asset-based loan on virtually anything business-related. Typically, when businesses borrow from a conventional bank, the funds they receive must be used for a specific purpose that has to be identified in the application process.
It’s easy to grow when you have an asset-based line of credit because as the value of your asset increases, your borrowing capacity automatically increases.
Quick Access to Funds
Asset-based loans can save the day when you need cash quickly. Most of the time, these loans take far less time to underwrite than standard small business loans. If you decide to utilize unpaid invoices, an invoice factoring company may be able to give you access to cash flow within a few days.
To learn more about the advantages invoice factoring can provide your business, reach out to the friendly team at TXP Capital. We can help you turn your unpaid invoices into the cash you need today.