If you are experiencing a cash flow crunch, there are things that you can do to try and get the business back on track. Are there assets belonging to the business that you could pledge as collateral in order to qualify for asset-based financing? In this article, we cover what you need to know about asset-based loans as you consider whether or not this is a good fit for your business.
Understanding Asset-Based Lending
Basically, this is a type of business loan in which the loan is secured by the assets of your company. Depending on the collateral you are offering as said security, the lender will determine the amount they are willing to loan your business. So what exactly constitutes collateral…everything from real estate to accounts receivable can fall within this asset category. If for some reason you are unable to repay the loan, then the lender can proceed to liquidate the assets and try and get back some or most of the money owed.
For newer companies or those who may not otherwise meet the lender's criteria, asset-based lending is a solid way to get the money required and thus help infuse the business with some cash flow. Or, additionally, if a more traditional lender has rejected your loan application, then again, asset-based lending could be one of the primary routes open to you.
What Constitutes Collateral?
There are a variety of assets that you can pledge as collateral against the loan. It must be entirely owned by the company and capable of being sold or liquidated in the event you default on the loan. Lenders do like to see those assets that are more liquid and can thus be quickly converted to cash. Securities for one are often readily accepted as collateral. Also, accounts receivable can be used. With these things, you may receive up to 85 percent of the total value depending on the lender's assessment. With things such as real estate and equipment, however, while they do still count, you generally will only see about a fifty percent valuation. This is because these are harder to sell and therefore considered less liquid.
The four most common forms of collateral that we've seen used in asset-based loans are as follows:
Accounts Receivable: If the account is due within 90 days or less this can be used as far as collateral goes. The exact amount you receive for the account receivable will be based upon a number of factors including, the terms and collection period.
Inventory: For those in manufacturing or possibly wholesaling, you may happen to have an excess of inventory sitting around. You can, in fact, use this as collateral against the asset-based loan. Again, the value given the inventory will depend upon a few different factors, primarily how easily it can be sold and thereby liquidated.
Equipment: If your business has equipment and/or machinery then this certainly can be pledged as your collateral. Keep in mind, these don't necessarily convert to cash all that quickly and so the value given such equipment will be less than say securities. The lender also has to look at depreciation in this case.
Real Estate: Real estate is also fair game when it comes to collateral for a loan. Like equipment though, it doesn't convert to cash all that rapidly. The lender will likely hire an appraiser to get fair market value on the property in question. In order to use real estate, you do need to have a fair amount of equity in the property.
When Applying for ABL Lending…
Asset-based lending does require more paperwork, as the assets involved need to be evaluated and assigned a dollar amount. You want to make sure going in that you are aware that it will take some time and due diligence on your part to see the loan process through.
You absolutely want to make sure you gather all the required documents; this helps the process go faster and prevents unnecessary delays. Also, double check to ensure that everything is up to date and free of any errors.
Balance Sheet: This shows the lender what assets you do actually own. It is one of the most important components of your ABL application.
Sales Forecast: The lender does want to know something about the future of the business. Having a thorough sales forecast that paints a picture of potential growth will certainly help your cause.
Banking Statements: Lenders often like to see two to four months of banking statements.
Prove the Value
In order to account for the value of the assets you may need to prepare the following:
Accounts Receivable Aging Statement: If you are thinking about using accounts receivable, then you'll need to show the age of the invoices, their terms and how many in total you have outstanding.
Inventory List: With inventory, the lender will ask for an itemized list of what you have, where it is currently located and potential resale value.
Equipment List: Again, this needs to be a detailed breakdown of what you have, when it was purchased, the condition, and location.
Is Asset-Based Financing Right For You?
Take a long look at your situation. Where does your business stand? Do you need the cash flow now? And do you have the assets to pledge in order to secure such a loan?
Yes, if you have collateral then these can be easy loans to get; however, keep in mind that if you cannot pay back the lender, that collateral will most likely be seized. Also, these loans do take a little more time as there are more moving parts than with just a straight forward business loan. So if you need cash ASAP, this may not be the best choice for your business.
Do remember, that the more liquid your assets, the more value you'll get and potentially even slightly better terms. This, of course, will depend on the lender and your individual situation.
At First Union, we offer many loans from short term loans to lines of credit if your business is in need of funding. Call today!