Asset Based Financing: Advantages & Limitations
Asset based financing is a funding option that enables businesses to access either a loan or a revolving line of credit that is secured by assets (i.e. collateral), such as inventory, equipment, receivables and so on.
Asset Based Financing Advantages
There are several advantages of asset based financing that make it an intelligent funding solution for many businesses. These include:
- Since funding is based on assets vs. profile (i.e. history of profitability, credit scores, etc.), it is much faster and easier to obtain than a conventional bank loan.
- The total cost of borrowing is typically lower than other types of funding options, such as factoring.
- Additional inventory that is acquired or generated during the life of the loan can be added to the borrowing base, which in turn can increase the loan (or line of credit if applicable).
Asset Based Financing Limitations
As with all business funding products, there are some limitations to asset based financing that are important to keep in mind as well. All of these pertain to loans where receivables are used as collateral (instead of equipment, inventory, real estate, etc.):
- Lenders may periodically want to verify a sample of invoices.
- Lenders may want to scrutinize larger transactions to ensure that a borrower’s customer has the capacity to pay in full and on time.
- Payment is often handled through a “lock box” arrangement, in which the borrower’s customers remit payments to a designated bank account. Lenders then credit the received funds against the loan balance.
The Real Reason Why Banks Do Not Offer Asset Based Financing
The fact is, most banks would be delighted to offer asset based funding, because it is indeed a smart and safe option for certain businesses that have sufficient collateral, and do not qualify for conventional bank loans (e.g. impaired or bad credit scores, less than two years of history, not cash flow positive, risky industries or marketplaces, etc.).
However, banks must follow strict federal regulations that, among other constraints, do not allow for loans where borrowers have relatively high debt-to-worth ratios. Since this typically characterizes most businesses that would be interested in asset based financing, banks are on the outside looking in — hence, their anti-asset based financing stance.
National Business Capital: Proudly Offering Asset Based Financing
At National Business Capital, we do not face these federal funding constraints, and as such we proudly offer asset based financing to businesses across the country.
To learn more and help determine if this is the optimal funding solution for your business, contact our team today or fill out our 1-minute application. You’ll receive a funding decision within 24 hours!
If you’re looking for asset based financing and banks keep turning you down, you’re not alone! Check out our eBook “How to Get Business Funding When Banks Say ‘No’” to see the reasons why banks deny loans and the next steps to take towards securing business funding!