Your guide to asset-based loans

Finding a loan to help get your firm off the ground can be tough, with lenders often unwilling to finance a small business with little in the bank. An asset-based loan is ideal for companies that lack revenue but have an abundance of material goods. Whether it’s the assets of the company or those of the director, this type of loan allows those assets to be used as the security.

How do asset-based loans work?

Asset-based loans are line of credit loans or standard lump sum loans that are tied to business assets. The lender will use the asset you’re offering to determine how much you’re able to borrow, which is usually between 70-90% of the market value of the asset. Repayments depend on whether you’ve opted for a line of credit or a standard loan facility.

What kind of assets can be used?

There is a range of assets that lenders will accept depending on the situation your business is in. However, before offering you a loan, the lender will want to be sure of the value of your assets and know that the assets can be easily turned into profit should things go awry.

In some instances, damaged and unfinished goods can be considered acceptable, along with intellectual property and past-due accounts. However, these won’t make for very convincing collateral in a bid to persuade a lender to part with its money.

The following assets are usually the best option for the majority of asset-based loans:

• Receivable accounts
• Office equipment
• Real estate
• Cars and other vehicles
• Agricultural vehicles and tools
• Inventory and materials

How do asset-based loans compare to other types of financing?

Asset-based loans are often easier for companies to obtain, as lenders see goods and products as a more tangible and reliable form of security than revenue in the bank. The borrower, meanwhile, can carry on with business without fear of their personal funds or possessions being seized.

Compared to invoice factoring, asset-based loans are generally considered less risky for lenders, while businesses have a wider choice of which assets to use as security. Asset-based loans also charge an annual rate rather than a fee, which is the case with invoice factoring.

Asset-based loans can be unique in some aspects but they also share common features with other types of finance. If you're not looking at securing any kind of business asset, you can consider your unsecured business loan options. The right loan will depend on your business and loan purpose.

Frequently asked questions

How long do asset-based loans last?

This depends on the lender, however, a typical asset-based loan will last for no longer than 12 months.

Are interest rates set or variable?

This will depend on the individual lender, with different services offering separate deals. Rates often fluctuate between 8-15% p.a., although lenders may alter this depending on the perceived level of risk.

How do I make repayments?

Many asset-based loans offer more flexibility in their repayment plans than traditional loans. You will often be able to choose how long you make repayments for and contribute single lump sum payments at the end of the loan period. This can reduce monthly expenses and the interest you pay.

How much of the total cost of my assets will I be able to borrow?

Loan-to-value ratio (LVR) will be dictated by the assets you provide. A loan based on accounts receivable will often come with an LVR of up to 95%, while assets in the form of stock and equipment might mean a loan of approximately half their worth.

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