Asset Based Loans

Asset Based Loans

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Table of Contents

    What is an Asset Based Loan?

    An asset based loan is a form of business lending that relies on your business's collateral rather than just cash flow and credit.

    With traditional loans, lenders look at cash flow first and collateral second. With asset based commercial real estate loan programs, lenders look at collateral first and cashflow second. Relying on the collateral to provide financing allows businesses that are growing rapidly to maintain the liquidity needed to keep up with working capital requirements.

    It’s also great for companies that have stable growth or are in distress and need to recapitalize their balance sheet. In most cases, shifting existing term debt into a formulaic borrow against assets based line of credit will result in improved cash flow and more liquidity for the business.

    Here are some of the reasons why many business owners prefer asset-based loans:

    • Use your business assets for working capital
    • Unlock tied up equity
    • Increase your line of credit
    • Borrow against your asset backed loan
    • Improve your balance sheet

    Loan Amounts

    $250,000 - $10,000,000+



    Starting at 5.25%



    10 - 14 Days

    How Asset-Based Lending Works

    Asset Based Lending focuses on the value of your assets, which will be used to secure the loan. Unlike traditional loans where commercial banking institutions consider cash flow first, asset-based loans look at the collateral you’ll pledge first. From there, they will assess your eligibility, including the amount you’ll qualify for, interest rates, and other terms.

    That said, if you have less than stellar credit, but your collateral is highly valuable, your chances of qualifying for asset based loans are still high.

    Applying for an asset based commercial loan from SMB Compass is simple. All you need to do is to submit a one-page online application form, at least six months’ worth of bank statements, and your business should be at least a year old.

    If you pledge inventory, real estate, accounts receivable, machinery, and equipment as collateral, lenders may require field examinations and inventory appraisals to determine the quality and marketability of your assets.

    The underwriting process takes a few weeks, but once approved, we’ll immediately wire the money into your account, and you can use the proceeds for almost any business purpose.

    Ready to apply for Asset Based Loan?

    What Are the Different Types of Asset-Based Business Loans?

    There are two main types of asset backed loans:

    • asset-based line of credit
    • asset-based term loan

    Here’s how each type of asset based loans work:

    1. Asset-based line of credit:
    Asset-based line of credits are structured as revolving credit lines that utilize the underlying collateral for additional working capital and improved cash flow. Some collateral used in the financing are highly liquid assets and has a fixed value. This includes machinery and equipment, while others are constantly churning, such as inventory and accounts receivable.

    Having a fixed collateral value on machinery and equipment will give a constant amount of liquidity on the revolving line of credit while the churn of both inventory and accounts receivable will provide a varying amount of liquidity. When more inventory is purchased, and new sales are made, the collateral value increases which will result in more capital being available on the revolving credit line.

    2. Asset-based term loan:
    Asset backed loan use the same collateral as an asset-based line of credit, but instead of the facility being a revolving credit line, it is structured as a term loan.

    The term loan can amortize over a period of 1 to 5 years with monthly principal and interest payments. By utilizing collateral that has a fixed value, such as real estate, machinery, and equipment, we are able to provide high loan to values with low monthly loan payments.

    Benefits from Asset-Based Business Loans

    • Increased working capital

    • You can pay suppliers on time

    • To fund your business expansion

    • You can’t qualify for other loans

    • You need a quick cash

    What Type of Collateral is Used for Asset Based Lending?

    Asset-backed loans enable companies to utilize a variety of collateral options to improve business cash flow. Although there is a long list of collateral options that can be used, there are some that are weighted more heavily than others.

    Accounts Receivable (A/R) – Once services have been rendered and a sale is official, an invoice is created and sent to customers. For a majority of asset loans the accounts receivable of a business are the primary asset that secures the asset-based line of credit or asset backed term loan. The LTV or loan to value can range, but average advance rates are 90% of the invoice amount. There are numerous items that affect the advance rate on an invoice. Some of these variables are the time it takes a customer to pay, payment terms that product is sold on, credit strength of each customer, and the concentration or diversification of your customer base.

    Inventory – Inventory is a core asset that can be used when looking to collateralize an asset based loan to improve cash flow. It’s common that business owners will value inventory at retail, but any asset based lender will look to understand what they can sell inventory for in the event of a default. The advance rate on inventory ranges depending on a variety of factors. Some of those factors include the location of where inventory is stored, the type of goods, and how easily inventory can be sold if needed. It’s also important for companies to have a perpetual inventory system to monitor inventory levels.

    Purchase Orders – A common asset used in asset backed finance are purchase orders or PO’s. When a customer places an order they issue a PO which outlines the order. The purchase order will show the order date, when goods are to be shipped, the quantity, price per unit, etc. When a PO is received by a seller an asset based lender will review the terms to understand who the customer is, the credit worthiness, and the value of the PO. The loan to value for purchase order financing ranges between thirty to forty percent and as soon as the goods are shipped and an invoice is created, the additional availability will be released.

    Machinery and Equipment – Considered a hard asset, machinery and equipment are favorable assets for assed-based lenders. By taking the make, model, year, and the condition of the equipment a lender will have the ability to assign a value to the equipment. The typical advance rates or LTV assigned to equipment and machinery is 60% of the FLV or forced liquidation value. This means that the lender will provide availability based on what they would be able to sell the equipment for in the event of a default.

    Commercial Real Estate – Although commercial real estate or CRE is a hard asset and a great form of collateral, it’s not as liquid as equipment, A/R, or inventory. In most cases CRE will be used as an additional asset to provide added liquidity on an asset-based facility, rather than the primary asset used to secure the loan. For example, if you were looking to borrow $5,000,000 from an asset-based lender and only had enough A/R and Inventory to get to $4,000,000, an asset-based lender would look towards your commercial real estate as collateral to provide you with the additional $1,000,000 of availability.

    Marketable Securities – Although not a core asset for asset based lending, marketable securities can be used as boot collateral. Securities are often highly liquid and provide lenders with collateral that can easily liquidated. Some examples are bonds. certificates of deposits (CD), or publicly traded stocks. Advance rates range depending on the strength of the security and can be anywhere from 50% to 95% of market value.

    Intellectual Property – IP is another asset that can be used in a borrowing base calculation but is very seldom used as standalone collateral. Since IP is an intangible asset, it’s very difficult to truly assign value to it, which means it can be used to help an asset-based lender provide a marginal increase of liquidity, but will never make up a substantial portion of the collateral base.

    Ready to apply for Asset Based Loan?

    What are the Rates for Asset-Based Lending?

    There are a variety of different asset based lending for small business, all of which have different structures, credit criteria, and asset based loan rates. Compared to unsecured loans, asset-based loans have much lower rates. In general, asset-based loan rates range from 5.25% to 15%. The financing can be structured as an asset backed line of credit or an asset-based term loan.

    Below is a list of factors that can affect your rate.

    • The age and quality of your machinery and equipment

    • Length of payment terms with your clients – 30, 60, or 90 days

    • The quality and size of your clients.

    • Previous payment history with your clients

    • The frequency at which your inventory churns

    • The profitability of your business

    • Your business credit score and vendor payment history

    • Property value based on recent appraisal

    Ready to apply for Asset Based Loan?

    What Documents Are Needed to Get Approved for an Asset-Based Loan?

    • Property value based on recent appraisal

    • Balance Sheet

    • A/R and A/P Aging Report

    • Business Tax Returns

    • Debt Schedule

    • Inventory Report

    Ready to apply for Asset Based Loan?



    How do I get an asset-based loan?

    If you're looking for an asset-based loan, the first step is to find a lender that offers them. There are a number of lenders who offer these loans, and you can usually find them by doing a quick online search.

    Once you've found a few potential lenders, the next step is to qualify for the loan. This process will vary from lender to lender, but typically they will want to see proof of your assets and your credit score. They may also want to know more about your business and how the loan will be used.

    If you meet all of the requirements, the final step is to actually apply for the loan. This process will also vary from lender to lender, but most applications can be completed online through alternative lenders. They may also have to conduct their due diligence, which can take weeks. If you’re not sure how the application process for a particular lender goes, give them a call. They will be more than happy to walk you through the entire application process.

    What is the difference between traditional lending and asset-based lending?

    With traditional loans, the bank often looks at your credit score and your ability to repay the loan first. An asset-based loan is different in that the lender will take into account the value of your assets, rather than just your credit score and revenue. This makes it a good option if you’re still working on improving your credit score or haven’t been in the business long enough to prove your profitability to banks.

    Asset-based loans are also a good option if you need money quickly, since the approval process is usually faster than with traditional loans. Plus, you'll be able to qualify for a much larger sum with asset-based loans since the lender is taking the value of your assets into account during the underwriting process.

    Who uses asset-based lending?

    Businesses that are capital-intensive in nature tend to go with asset-based loans to get the cash they need to sustain their business. Companies under the distribution and manufacturing industries would generally find asset-based loans a viable financial resource. The same holds true for retail, industrial, apparel, and staffing businesses.

    What is the difference between cash flow loans and an asset-based loan?

    There are a few features that separate cash flow loans and asset-based loans. First, cash flow lending primarily bases your eligibility on your projected future revenue. There is no collateral involved in this type of financing. Therefore, the business won't risk losing a valuable asset in the event that they become unable to pay off the loan. Cash flow lending also takes lesser time to approve as no appraisals are necessary.

    On the other hand, asset-based lending allows businesses to borrow cash based on the value of their balance sheets. With this type of financing, companies can use their inventory, invoices, properties, equipment, and other assets to secure funding. Compared to cash flow loans, asset-based loans take longer to get approved since the lenders might have to conduct thorough due diligence.