Asset Based Lending & How CFO’s Can Leverage It As An Option For Their Clients
Yet it is possible to avoid bankruptcy without making sacrifices — thanks to alternatives such as asset-based lending.
If you are a struggling company of any size, learn why hiring a temporary CFO to discuss better business lending practices may be your perfect solution.
What Is Asset-Based Lending?
This type of lending refers to credit extensions via tangible assets found on your company’s balance sheet.
It is applicable to virtually any type of business, from sole proprietorships to partnerships to LLCs, to huge corporations.
These loans are granted based on valuable assets provided as collateral.
Liquid collateral is usually preferred, such as those that fall under the “accounts receivable” category, as they can easily be converted into cash and used to pay back the loan should the company default on it for any reason.
The “more liquid” the asset in question, the higher the loan-to-ratio.
Other options may also be used as collateral, such as inventory and equipment.
Companies are generally allowed to borrow 75 to 85% of their accounts receivable value, while the borrowing base for equipment and inventory is usually around 50%.
Whether liquid or other assets are pledged, the loan is never the full value of the asset. For example, if the liquid is valued at $250,000 and 85% of its value is borrowed, the loan is $212,500.
Temporary CFOs may be hired to determine the borrowing base by reviewing available assets as well as documents such as ledgers.
If you are getting ready to apply for this type of loan, use these steps to make the process easier for yourself:
Step 1: Hire a temporary CFO.
Step 2: Work with said CFO to determine the best loan amount for your company’s needs.
Step 3: Assess the value of your liquid and tangible assets with professional CFO assistance.
Step 4: Decide which assets should be put up as collateral.
Step 5: Create a plan with the CFO that benefits your business both in the short and long-term.
Now that you know what asset-based lending is and how it works, take a moment to learn about the benefits.
Asset-Based Loan Benefits
⇒ Easier Qualifying
Qualifying for a loan of this kind is a relatively easy process compared to a line of credit or other business loans.
Companies do not require years upon years of profitability to get the loan they need, only valuable assets that a CFO or other professional can leverage without issue.
A display of invoices from commercial clients with outstanding credit is one of the quickest and easiest ways to demonstrate collateral because they can be turned into cash almost immediately.
Most lenders prefer invoices that pay in at least 70 days, and will also accept the aforementioned inventory and equipment as collateral or additional collateral.
⇒ Protects Business Reputation
These loans are a discreet and wonderful way to protect your business’s reputation.
The stigma of bankruptcy is, unfortunately, something that follows both businesses and individuals for years, and often makes other companies wary of partnering with you for any reason.
Rather than waiting for an extremely long time to shake off bankruptcy and hoping your business does not suffer too much, opt for this simple and helpful lending option your temporary CFO will be happy to guide you through.
Your reputation will remain intact so you can continue to grow and thrive as a business.
⇒ Lower Interest Rates
Asset loans have a much lower interest rate compared to lines of credit and unsecured loans.
This is because unlike credit lines and unsecured options, asset loans mean the lender can seize whatever has been put up for collateral if necessary.
There is subsequently no risk to the lender if the loan’s receiver defaults. Interest on these loans is based on its size and generally ranges from 7 to 17%.
The interest takes the form of an APR or annual percentage rate.
⇒ Increased Flexibility & Fewer Restrictions
Again, because such loans are based on liquid or tangible collateral, they offer greater flexibility.
Institutions that offer these loans do not set guidelines for how the money is used so long as it is spent on the business.
Fewer restrictions and an increased flexibility also make it possible for your line of credit to increase as your profits do without having to engage in the underwriting process once again.
If your company is on the rise and you will benefit from an increased credit line, this flexibility is ideal.
⇒ Improved Liquidity
One of the most significant benefits asset loans provide is better liquidity.
You will enjoy the consistent cash flow you need, as well as increased financial stability.
This again is ideal if you are a business that continues to grow every day and is working with a CFO to sort out the kinks.
It is also highly beneficial if your business is more seasonal in nature, such as a company that markets products specifically for the holiday season, as you will not have to deal with a financial “interruption.”
⇒ Opportunity To Build & Improve Relationship With Lender
Lines of credit based solely on assets also provide the opportunity to build your relationship with the lender and subsequently further expand your business.
Qualified CFOs know how to help you improve your lending track record to ensure your relationship with your lender becomes firmly established.
You may be able to qualify for less expensive loans after a time so your business keeps growing instead of constantly fighting the dark shroud of bankruptcy.
TAB Bank is your banking partner for CFO. The company is an expert in providing bankruptcy alternatives and works with temporary CFOs around the country to provide businesses with exactly what they need to succeed.
If you are in the process of hiring a CFO, consider the bank ready to help you every step of the way.
Visit our site here to learn more today.