Small business owners know that the road to success is paved with many challenges. Business owners face an onslaught of obstacles every day, from hiring qualified employees to marketing products and services. But of all the problems entrepreneurs face, financial challenges are the most prevalent. Fortunately, securing additional working capital is not as difficult as you think.
What Is an Asset-Based Loan?
An asset based loan is a financing solution that uses business assets as collateral for the loan. You can leverage assets like accounts receivable, commercial real estate, inventory, purchase orders, machinery and equipment, marketable securities, and intellectual property to secure financing.
Since your assets are the collateral, it mitigates the lenders’ risks, so the interest rates for an asset-based loan are generally lower than unsecured business loans. The value of your assets determines the interest rates and the amount you can borrow.
Tips to Increase Your Chances of Qualifying for an Asset-Based Loan
Both SMEs and large companies can qualify for asset-based loans. It’s a great financing option for distributors, retailers, and wholesalers. Lending companies prefer to lend money to businesses with a stable balance sheet with valuable assets.
Here are some of the tips to remember when applying for asset-based financing:
1. Calculate How Much Funding Your Business Needs
When applying for a loan, business owners often focus on how much money they could get. But on the contrary, it’s better to get a close estimate of how much you really need to borrow by evaluating your needs.
For instance, you need to know how much your company needs for short-term expenses or projects; otherwise, you may end up borrowing (and eventually paying) more than what you need. On the other hand, underestimating the amount of loan you need can also put your finances at risk.
Before applying for an asset-based loan, evaluate your business, and know exactly how much funding you need. If your assets aren’t valuable enough, you can apply for supplemental funding or go for a different financing option.
2. Know Your Personal and Business Credit Rating
Lending companies use your personal and business credit scores to gauge your creditworthiness. Strong credit history plays a significant role in qualifying for a loan and getting better rates and terms. For businesses with no credit history, lenders will usually review their personal credit scores or consider other qualifications and guarantees.
Applying for an asset-based loan with bad credit can affect repayment terms and interest rates. Fortunately, you can improve your business credit score by maintaining lines of credit, paying off existing debts, and making payments on time.
3. Prepare a Business Plan
Most lenders require potential borrowers to submit a comprehensive business plan. They want to know where your business is at and where it’s heading before investing a substantial amount of money. A business plan also lets you know how much money you need to borrow and how fast you can pay it back.
Your business plan should contain the following information:
- Executive summary
- Products and services
- Market analysis
- Marketing strategy
- Financial planning
- Management and personnel
Lenders would want to see previous financial statements and forecasts for your business. It should also include a statement of collateral, listing the types and value of assets you’ll use to secure the loan.
4. Decide Where to Apply: Bank or Online
In the past, the only way to get a loan is to get in touch with a bank or local lender. You’d have to go to the lending company, bring piles of paperwork, and fill out dozens of forms. Fortunately, technology has come a long way and online business loans are now an option.
It helps to know how both options help you:
The Benefits of Bank Loans
- Interest rates are usually cheaper than online business loans
- Meet with the lender personally
- You already have a relationship with your bank
- Ask for feedback from other businesses that took out a bank loan
The Benefits of Online Business Loans
- Faster funding compared to bank loans
- Easy and convenient online applications (you can also ask for help from customer support)
- Connect with several lenders with one application
- An excellent option for businesses with bad credit
5. Prepare Your Documents
Prepare all the necessary documents before applying, such as cash flow statements, bank statements, tax returns, and more. The requirements may vary from lender to lender, so it’s better to ask ahead of time. After submitting your loan application and your documents, the lenders will review your application and decide whether you’re eligible for funding or not.
6. Follow Loan Application Best Practices
Carefully review your business loan application before you submit it. If anything is unclear or you have any questions, reach out to your lender before committing. This allows you to avoid mistakes that could delay the application process.
Here are some of the tips you should keep in mind:
- Provide accurate information. You can be sure that lenders will verify all the information you’ve given them. For example, they’ll ask tax returns to verify revenue. To avoid problems, make sure that your answers match the documents.
- When necessary, provide follow-up information ASAP. If your lender needs a specific document, be sure to send it to them ASAP while your application is top of mind.
- Take your time. Even if you need immediate funding, it’s wise to take your time filling out your application. Your documents need to be accurate and the information you provide should be consistent. Rushing a loan application usually results in double work.
- Be organized. Lenders like to review an organized application. Organized, labeled, and accurate paperwork will most likely be reviewed first.
An asset-based loan offers spending flexibility that most business owners need. You’ll be able to use the funds for almost any business purpose, such as buying equipment, adding inventory, making payroll, and meeting day-to-day expenses.
Leveraging your assets to secure financing is a great way to keep your business debt-free. It also allows you to pursue other unsecured loan programs in the future.