Are you looking for alternative ways to ensure an ongoing flow of capital for your business? If so, it may be time to consider asset-based lending. Some examples of assets that you can use to secure a loan include property, plant, and equipment (PP&E), marketable securities, and inventory.

Since your asset is securing the loan, it is less risky than unsecured lending, which is a loan that is not backed by assets. Because of this, you are charged a much lower interest rate. Also, the more liquid your asset, the less risk your loan will be, and the lower interest rate that you will have to pay.

An example is with an asset-based loan that is secured by your accounts receivable. This is deemed a safer option than asset-based loans that are secured by the property.  That’s because the property is illiquid, and the creditor may find it challenging to liquidate the asset quickly.

Amount Considerations for Asset-Based Lending

Asset-based lending commonly refers to the loan-to-value ratio. One example is if the lender stated that the loan-to-value ratio for the asset-based loan is a total of 80% of your marketable securities. That means the lender you are using provides you with a loan of up to 80% of the total of all your marketable securities.

The ratio offered by the lender is dependent on the asset type you are using. Most lenders will offer a better loan-to-value ratio if you offer more liquid assets.

Top Benefits of Asset-Based Lending

Asset-based lending provides several benefits to a borrower. For example, they are faster and easier to receive than an unsecured loan or line of credit. Also, this type of loan usually doesn’t have as many covenants. In most cases, your asset-based loan will be offered with a much lower interest rate compared to the other funding options you may find.

However, it is not just the borrower that benefits; the lender does, too. For example, asset-based loans aren’t as risky as others. Also, if the borrower happens to default on their loan, the lender will obtain the assets that were used to secure the loan.

Consider an Asset-Based Loan

It is a good idea to consider an asset-based loan when you are looking for funding options for your business. The information here provides you with a general overview of this lending option and will help you decide if it is right for your business.