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What is Asset Based Financing For Your Business Needs?


Asset based financing requires the business owner to pledge assets to secure a loan.  The asset based finance industry has experienced much growth over the last few years mainly fueled by small businesses.  When a small business experiences cash flow issues often a tradition loan is not available, therefore they may need to use their assets as collateral to obtain the cash they need.  These assets are generally inventory or receivables but other assets may be used as well. 


Asset based financing is best for companies experiencing a lot of growth.  It is an excellent source of short-term cash.   Historically these types of loans have been more expensive than other types.  However, the growth of the industry has brought more competition and lower rates.  It is important to shop or go through a broker to negotiate the best rates for your loan.   Factors such as your business credit history, balance sheet, and the liquidity of your assets will determine the rate and terms offered by the lender.


A small business often uses its inventory as collateral for asset based loans, but sometimes they use receivables instead.  Outstanding invoices can either be used to get an accounts receivable loan or used for factoring.  When accounts receivable are used as security a business will get 75% of their value on average.  This loan-to-value rate, LTV, drops dramatically for older receivables.  Many companies may give little or no value to older receivable, especially those over 90 days. 


Accounts receivable factoring, or invoice factoring, differs in that it is not actually a loan but a purchase of your receivables.  The factoring company will purchase your receivables for a percentage up front, and then pay the remainder, less fees, once the invoices are collected.    This allows a business owner to focus on building their business rather than chase slow paying customers.  This can be advantageous to a growing company because it not only allows them to get cash quickly, but also does not show up as a liability on their balance sheet.  The lack of additional liability will be helpful when trying to obtain other forms of financing for your business.


Asset based financing is flexible and it allows businesses to get money quickly.  This can be beneficial if your business is growing quickly and need cash flow to sustain the growth.   The main drawback to asset based loans and factoring is that they can be expensive, and therefore they can cut into your businesses profits.    


** See our Most asked Questions on Factoring