When looking for a business loan, it is usually a good idea to make sure you have a profitable business, strong revenue history, and good credit. Not every business has these characteristics, however, which is why asset-based lending can be another way to get the money your company needs.
For brand new businesses, growing business, or businesses that aren’t profitable yet, asset-based lending can be the key to securing the loan to help the business grow.
What is Asset-Based Lending?
To put it simply, asset-based lending is when lenders look to see how asset-rich a company is to use as collateral for a loan. In this way, lenders can put a lien on pieces of equipment to minimize the risk of lending to a business that may not otherwise be approved for a loan.
Who Should Consider Asset-Based Lending?
As mentioned above, companies with less than stellar credit could benefit immensely from this sort of financing. It isn’t uncommon for a company (for example, a small construction company) to have a lot of equipment but not necessarily the best credit or revenue history. This is when asset-based lending can be beneficial, because the lender can use the already owned equipment as collateral for the new loan. In this way, the lender is secure because they have equipment they can obtain if the loan goes bad. Additionally, the borrower gets the money they are looking for. Asset-based lending is less concerned about profitability, cash flows, and credit scores. Although these do still play a role in the lenders decision, if there is sufficient equipment to use as collateral, an asset-based lender will typically be willing to offer financing.
How do I Apply for an Asset-Based Loan?
The only drawback to an asset-based loan is that it can be a little lengthier of a process. Lenders typically favor a long-term relationship with their borrowers due to the time and resources it takes to approve a loan of this nature. Lenders want to see a copy of the front and back of the title from the equipment being used for collateral, as well as pictures of the equipment as well.
What Kind of Assets are they Looking For?
Some of the easiest types of asset that asset-based lenders can use as collateral are machinery and equipment. This can include trucks, trailers, excavators, skid steers, cranes, etc. Using a franchise store as collateral to open a new store is another way that we at Harbour Capital help franchisees open new locations to expand.
When you have decided that you are ready to take on this process, the best way to start an asset-based loan is to simply give your lender a call and discuss what the best steps would be. One thing to remember is that the newer the equipment, the better the chances that it will be able to be used for collateral. With that in mind, asset-based lenders won’t always need to use all of the assets on your balance sheet to approve you for a loan. If there are a few particular pieces of equipment that your company absolutely needs to function, you can use other pieces of equipment as collateral to ensure that your key assets are available without any liens on them.
What Might Stop Me from an Approval?
When looking for an asset-based loan, make sure that the assets you plan to use are “free and clear”. You might be wondering what “free and clear” actually means, and basically it just means that there aren’t already any liens on your equipment to begin with. If there are already liens on equipment, lenders will be hesitant to use this equipment as collateral because another organizations/lenders might be able to take that equipment before the lender can if the loan goes bad. The lender will be able to tell if the equipment is “free and clear” by performing a UCC (Uniform Commercial Code) search on your company.
Lenders will also sometimes send an independent appraiser to your equipment’s location to take a look at the condition of the equipment to determine the value of the equipment. This is done just in case the loan goes bad and the lender needs to repossess the equipment. This is a common place that borrows hurt their relationships with lenders by overvaluing the equipment they are trying to use for collateral. It is vitally important to be honest with the lender when they are asking these questions (do you own free and clear, what is the value of the equipment) in order to build a strong relationship with the lender so that your company can secure financing for all of its purchasing needs.
If you are interested in securing a loan for your company by using some equipment that you already own as collateral, give us a call today and we’d love to help your business grow!