When you apply for asset-based lending, the financial institution processing your loan relies solely on the value of assets as collateral. This differs considerably from most types of business loans where the lender reviews the applicant’s credit report, credit score, references, banking information, and other financial data to determine creditworthiness. The owners of smaller or newer companies who have trouble meeting these high standards have an alternative option available to them with asset-based lending.
How Asset-Based Lending Works in Practice
Lenders approve an asset-based loan by reviewing a company’s balance sheet to determine which of its assets are most valuable. If you receive this type of loan and default on it, the lender can seize the item you pledged as collateral and sell it to recoup its losses. You should therefore consider the asset you want to offer as collateral carefully and ensure it’s not something your company couldn’t live without if the worst happened and you couldn’t repay the loan. Common examples of assets used with this business loan type include accounts receivable invoices, inventory, and business equipment.
Lenders typically offer 75 to 85 percent of the market value of accounts receivable invoices and 50 percent of the value of inventory or business equipment. This is due to long-standing rules that lenders will only offer a portion of the value of the asset to protect their own interests. You must typically have a substantial asset to offer as collateral to qualify for asset-based lending. The lender you work with may require some or all of these documents when processing your loan request:
- Balance sheet
- Bank statements
- Profit and loss statement
- Sales projections
- Tax returns
- Valuation statement for your asset
To help identify quality assets, we recommend that you make a list of your company’s inventory, equipment, real estate holdings, and value of its accounts receivable. We also invite you to contact Kasher Capital when you’re ready to submit your application or learn more about asset-based lending.