Businesses looking for extra capital have the option of taking out asset based loans. The loans look to your balance sheet and the assets you have to offer as collateral for the financing. If you are a business that does not have tangible assets, meaning those that can be liquidated into cash, you will not qualify for an asset based form of funding. If you do have plenty of assets, then this is one way to get capital for your needs.
Funding for Expansion
Asset based loans are an excellent financing tool for a business looking to expand. Expansion usually comes at a time after your company is already established and experiencing significant growth. So much so, that you will increase your profits by opening another location or investing in another product to sell. You already have a solid asset base, i.e. your current store and inventory, so you can use that alongside your projected profits from your soon-to-happen expansion to secure your asset based financing.
Funding for Operating Costs
You might also look into this type of funding if you need additional capital to cover your operating costs. Perhaps you’ve hit a rough patch and need the cash to cover expenses until your accounts receivables come in. This type of loan can give you instant capital based upon your projected financial future. In other words, if you know you have X amount of dollars coming in receivables next month, you can use that as collateral for the operating capital you need this month.
Think Secured Versus Unsecured
When considering asset based loans for your extra capital, think secured versus unsecured. Secured loans are those backed up by the borrower’s collateral, e.g. a home mortgage where the bank can take possession of the home if the borrower defaults on the loan payments. Unsecured loans are quick-cash loans, which are generally offered at much higher interest rates and don’t require collateral to back the funding up.
Asset based loans are secured loans. You are offering the financial institution collateral in exchange for cash. In some cases, the bank might take that collateral directly to pay back the loan, such as collecting on your accounts receivables and then giving you a percentage of the payments. In other cases, you will make the payments and the bank will take possession of your collateral if you default, such as with inventory. Either way, these loans are an effective way to get your hands on additional capital when you need it.
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