As a small business owner, does it sometimes seem like you never have enough cash in place when you need it the most? Despite careful budgeting, some things like severe weather or a global recession are out of your control. You may not want to apply for a bank loan or run up your personal or business credit card balance every time your business needs a bit of extra cash. If so, asset-based lending can make an attractive alternative.

Understanding Asset-Based Lending

Many traditional loans require you to put up a valuable piece of collateral for the lender to consider you for approval. With asset-based lending, you can use the value of a current asset such as accounts receivable invoices instead. Physical inventory and business equipment that you already own are two additional popular options.

For new small business owners or those whose credit history doesn’t support a traditional loan, asset-based lending provides an alternative for them to secure the funds they need. Lenders typically prefer to work with accounts receivable invoices as collateral and may require that you don’t owe a balance on any piece of business equipment you’re considering using. Newer accounts receivable invoices will get you a bigger loan than older ones that may be hard to collect. Most lenders provide a maximum of 85 percent of the value of the asset in loan proceeds.

Invoice Factoring is a Form of Asset-Based Lending

While strict asset-based lending considers a variety of assets to secure a loan, invoice factoring only uses outstanding invoices owed to you by customers. With this arrangement, the factoring company purchases the invoices and typically becomes responsible for collecting the balance when it becomes due. You receive a percentage of the invoice value in return with the factor holding some of it in escrow until your customer pays the balance. Keep in mind that you will repay more than the invoice value after the factoring company adds interest.

Could straight asset-based lending or invoice factoring be the right type of financing for your small business? Please contact Coastal Commercial Lending today to learn more or request an application.