It can be difficult to obtain funding for your new business venture, especially when the economy has traditional lenders watching their accounts more closely. Fortunately, a bank isn’t the only place you can turn for financial assistance, and asset based lending may be a more profitable resource for your company. There are some key distinctions to keep in mind between an asset-based loan and a traditional bank loan, and knowing these features can help you choose the right funding source.
The Difference in Definition
An asset-based loan situation involves a lender approving and issuing funds based on the assets that a borrower presents. These assets aren’t limited to property value, as in the physical land the company or business owner holds. Assets can include accounts receivable, equipment, machinery, or inventory. On the other hand, traditional lending may refer strictly to an issued bank loan. These require an approved credit score, strong cash flow, and verifiable business history. These loans don’t always require collateral, though it depends on the lender.
The Difference in Eligibility and Approval
Small businesses or new start-ups tend to have an uphill battle getting a loan approved from a traditional lender. In November of 2018, it was estimated that only 26.9% of small business loans were approved by big banks. Smaller banks were a little more accepting, though just about 50% of all loan applications were denied. The eligibility criteria for traditional lending is much more stringent and restrictive than asset based lending services.
With an asset-based loan, the lender is looking at the value found your company’s assets. If you have valuable collateral to put up, the more likely you are to be approved for a loan. These lenders are also more interested in the probability that you will make payments now and in the future, which puts a higher value on high liquidity collateral.
The Differences in Lending Terms
Traditional loans have longer processing times, sometimes takes several months to have funds approved and distributed. The repayment terms are also factored in according to a monthly amount and interest charge. Asset-based options have a quick turn around time for funds distribution, and the repayments are often assessed according to your company’s current financial status with a layer of flexibility built-in.
Depending on your financial situation, you may find a larger sum of money available through a traditional lender. However, you may find that an asset-based loan is more efficient and better suited to the way your business operates.