Running a successful business presents financial challenges, especially maintaining a steady cash flow. Asset-based financing is one financing solution that can help improve cash flow.
What is asset-based financing?
Asset-based financing (ABF) is a loan secured by a business’s assets. Examples of assets you can use for ABF include accounts receivable, inventory, equipment, and real estate. Unlike traditional loans, which rely heavily on creditworthiness and cash flow projections, asset-based loans focus on the value of the collateral provided. Thus, businesses with valuable assets but less-than-perfect credit can still access necessary funding.
How does ABF work?
In ABF, a lender evaluates the value of a business’s assets and offers a loan based on a percentage of that value. For example, a lender might provide a loan equal to 85% of the value of accounts receivable. The business continues to operate as usual, using the loan to manage expenses, while the lender holds a security interest in the assets used as collateral.
4 benefits for businesses
Using the assets you already have to access the capital you need has several benefits, including:
- Access to working capital: Projects often involve significant upfront costs, with payments coming in stages or upon completion, which leads to cash flow gaps that make it challenging to cover day-to-day expenses.
- Flexibility: Asset-based financing can be more flexible than traditional loans. As the value of your assets grows, the amount you can borrow may increase, providing a scalable solution that can grow with your business.
- Quick approval process: Since collateral secures asset-based loans, lenders may have more lenient approval criteria than traditional loans. Asset-based lending can be particularly beneficial for businesses that may not have a long credit history or have faced financial challenges.
- Use of various assets: Businesses often have valuable equipment and material inventory that meets collateral requirements. ABF allows you to leverage these assets to secure funding, turning otherwise illiquid assets into a source of capital.
Considerations to take before deciding to use ABF
While ABF offers several advantages, it’s essential to consider the following:
- Asset valuation: Lenders assess the value of your assets to determine the loan amount. Maintaining your equipment fleet and other assets maximizes their value and directly impacts the amount a lender is willing to finance.
- Costs and fees: An asset-based loan has various expenses, such as appraisal fees, monitoring fees, or higher interest rates than traditional loans. Factor these costs into your decision to choose this financing option for your business.
- Impact on operations: Using assets as collateral means that if your business defaults on the loan, the lender has the right to seize those assets. This could impact your operations, especially if essential equipment or inventory is involved. Careful planning and financial management are necessary to avoid operational challenges.
5 steps to implement asset-based financial solutions
If ABF is the best financing tool for your business, follow these steps:
- Assess your assets. Identify which assets your business can use as collateral. Potential assets include accounts receivable, inventory, equipment, or real estate.
- Research lenders. Not all lenders offer asset-based financing, and terms can vary significantly—research potential lenders to find one that understands your industry and offers favorable terms.
- Prepare all required documentation. Lenders require detailed information about your assets, financial statements, and business operations. Having all your documentation ready can streamline the application process.
- Evaluate the terms. Carefully review all terms, including interest rates, fees, and covenants. Ensure that the financing aligns with your business needs and that you can meet the obligations.
- Create your repayment plan. Consider how using financing tools will impact your cash flow and if you can meet the repayment schedule without compromising your operations.
Equify Business Funding: Your asset-based financing partner
When securing the capital your business needs, having a trusted financial partner makes all the difference. Equify Business Funding, a division of Equify Financial, specializes in asset-based solutions to help businesses like yours improve cash flow, manage expenses, and grow.
Our team takes a personalized approach, working closely with you to understand your business, assess your available assets, and structure financing solutions that align with your goals.
Don’t let cash flow challenges hold your business back. Partner with Equify Business Funding and turn your assets into opportunities. Let’s talk today!
