Before you seek asset-based lending, it’s important to know what’s required so you’ll have a better chance of getting approved. It’s also important to understand how asset-based lending works. It will help you determine whether it’s right for your small business. In short, asset-based lending is suitable financing solution for small, mid-sized, and large businesses that have collateral to pledge in return for financing. It’s issued in the form of a term loan or line of credit. It requires an extensive review of a company’s financial statements and other documents. The type of collateral that’s usually pledged for an asset-based loan includes commercial real estate, equipment, inventory, machinery, and accounts receivables. Yet, it takes more than having collateral to get asset-based financing. In this blog, I discuss the asset-based lending process. I go over the questions you likely need answers to before applying for an asset-based loan.
What Do Most Asset-Based Lending Companies Expect of the Businesses They Lend To?
Small businesses that seek an asset-based lending solution don’t have the personal or business credit rating (or track record) to seek traditional financing. Asset-based financing is an alternative way to fund a business using collateral as a promise to pay back the lender. Asset-based lending companies expect small businesses to have a steady cash flow and collateral that holds enough value to be pledged in return for financing. To apply for asset-based financing (i.e. term loan or line of credit), you’ll likely need to submit the following documents and meet the following requirements:
- Most Recent Company Balance Sheet
- In Business for at Least 12 Months
- Generate at least $15,000 in Revenue Per Month
- Most Recent Profit & Loss Statement
- Current Accounts Receivable Aging Report
- Last 2 Years of Business Tax Returns
- Last 2 Years of Personal Tax Returns
- Last 12 Months of Business Bank Statements
- Current Business Debt Schedule
- Business Must be Profitable or Break Even
- Lower Personal Scores Accepted
- No Recent Late Payments, Delinquent or Derogatory
Asset-based lending companies have different requirements for approval. Yet, the above requirements (and documentation for approval) are standard across the industry. Before approaching an asset-based lender, be sure that you have all the documentation above available. If you don’t it will slow down the processing time of your application.
What Type of Businesses Do Asset-Based Lending Companies Fund?
This primarily depends on the financial institution you approach for asset-based financing. However, the typical asset-based lending group provides business capital to companies in the following industries:
- Construction Companies
- Commercial Real Estate Companies
- Ecommerce & Retail Companies
- Technology Companies
- Restaurant Companies
- Home Healthcare Companies
- Franchise Companies
- Commercial Cleaning Companies
- Security Services Companies
This is by no means an extensive list of the types of businesses funded by asset-based lending companies. It’s all on a case-by-case basis. The past, present, and future sales and financial state of the business is what’s most important to asset-based lending companies.
How Much Business Capital Can I Get from an Asset-Based Lending Company?
The amount of business capital that is obtained from an asset-based lender depends on a company’s borrowing capacity. Borrowing capacity is the amount of money a business can borrow based on its current financial state. Companies can borrow 10% to 15% of their total annual revenue. For example, if your business generates $1.5 million annually, you may be able to get $150,000 to $225,000 in financing from an asset-based lending company. Some asset-based lenders do have minimum borrowing amounts. This means they won’t lend less than a certain amount of money to a business.
How Do I Find a Suitable Asset-Based Lending Company?
There are many asset-based lending groups out there. Navigating the internet to find the most suitable asset-based lender can be daunting. That’s why companies like LenCred exist. LenCred focuses on helping companies get unsecured business credit from traditional banks and credit issuers. Yet, we have relationships with asset-based lenders as well. The best way to find a suitable asset-based lending company is to work with a Small Business Financing expert like LenCred. Small business financing experts understand the plethora of different business financing solutions available. They will analyze your business and financial situation to determine which asset-based lender is right for you. This can cut down the time you spend searching for a suitable asset-based finance company.
Accounts Receivables Financing is a Popular Asset-Based Lending Solution
Accounts receivables financing is a popular asset-based lending solution for small businesses. For example, I helped one of my clients get $250,000 in accounts receivables financing. This was a security personnel business that generated at least $1.5 million in annual revenue. The security company was doing well but would run into cash flow problems which made it difficult to maximize the use of their employees. The cash flow problems stemmed from their clients paying on a net-30 basis. This meant they had to wait 30 days before their clients paid them for the delivery of their security services. They were able to get an accounts receivables line of credit within 30 days of the day they began working with me.
What Alternatives Do I Have to Asset-Based Lending?
This depends on many factors. These factors include (but are not limited to) the following:
- Business Location
- Personal Credit of the Business Owner(s)
- Business Credit History & Score
- Monthly and/or Annual Business Revenue
- Length of Time in Business
- Business Industry/Types of Products or Services Offered
- Annual Income of the Business Owner(s)
- Current Outstanding Business Debt
Whether you apply for bank financing, accounts receivables financing, asset-based financing, or any other type of lending solution, lenders will check everything related to your financial situation. This information determines what alternatives you can use to fund your business. If this is your first time seeking an asset-based lending solution to finance your business, working with an expert is critical to your success. The best experts will help you understand what type of financing is suitable. LenCred may be able to help you do that. Contact the LenCred team today for more information.