Asset based lending is a great tool your business can utilize to meet its financing needs. An asset based loan (ABL) uses company assets, such as accounts receivable or inventory, to secure the loan. ABLs can either be loans or lines of credit, but most are structured as lines. Despite asset based loans being a flexible alternative to traditional bank financing, negative myths about asset based lending and lenders exist. In last week’s blog we addressed dispelled three common myths:
Myth #1: Asset based lenders are where inferior companies turn when they can’t get traditional bank financing.
Myth #2: Asset based lenders are only concerned with the value of the collateral.
Myth #3: Asset based loans are too expensive.
We learned that many healthy companies choose asset-based lenders due to their flexibility, revolving lines of credit, fewer financial covenants, and the security of being backed by their collateral. In addition, we discovered that although the market value of collateral helps the borrower obtain a larger line of credit and higher advances, asset-based lenders examine many qualities in a company, such as the business plan, the leadership team, and the need for a working capital solution. Lastly, we learned that asset-based loan pricing offers competitive rates in comparison to high-risk unsecured loans.
This week we will continue with this theme and address three more common myths associated with asset based lending.
Myth #4: Asset based loans are restrictive and inhibit business growth.
If a business applies for a traditional bank loan, it’s often restricted in how it can use the loan proceeds. Generally, the business has to indicate on the loan application how it intends to use the funds which in turn restricts the borrower’s use of the funds. In fact, the borrower may have to pay the money back or pay heavy penalties if it uses the loan proceeds for a purpose not specifically stated on the loan application.
On the other hand, asset based loans are more flexible. First, credit availability adjusts with the value of the assets securing it. Second, borrowers can utilize the proceeds in the normal course of the company’s business and are not restricted to using the funds for one sole purpose. This is especially important if an unforeseen financial crisis occurs. Among other purposes, borrowers can use the funds from an ABL to grow their businesses by:
- Taking advantage of purchase discounts
- Advertising online and in print media
- Making payroll
- Hiring and training an expanded workforce
- Purchasing inventory and supplies
- Expanding its customer base
Check out our Business Owner’s Guide to Asset Based Lending
Myth #5: If I can’t get a bank loan, maybe I shouldn’t borrow money.
Business owners who are declined for traditional bank loans may think alternative credit sources come with high rates and extremely unfavorable terms. They do not want to get saddled with a financial burden that they are unable to repay thus further damaging their credit rating and payment history.
Many do not realize they can get the money they need by using the assets their business already owns to obtain an ABL. In addition to that, they only borrow what they need, which reduces the overall risk and interest expense.
Even for a company who is turned down by a traditional lender, it’s advantageous to explore the options an asset based loan offers.
Myth #6: Reporting involved is too laborious and time consuming.
Another misconception is that reporting on assets takes too much time—after all the value of the collateral may change from day to day, especially when it’s accounts receivable or inventory. Depending on the risk involved with lending to the borrower, the business may have to report changes on a daily, weekly, or monthly basis.
This reporting is necessary, but fortunately modern workplace technology makes it easy to provide asset based lenders with updates on the accounts receivable, inventory, or equipment used to secure the loan. Typically, this reporting is not anything that the business isn’t already generating in their daily course of business.
At VCF, we work with the borrower to determine what documentation and reporting they already have and customize reporting requirements using their reports, such as sales/invoice journals, registers, and perpetual inventory schedules.
Explore the potential of an asset based loan
With common myths about asset based lending dispelled, you can now pursue this type of financing with more interest and confidence. If you look at the facts, you’ll quickly see why asset based lending may just be the best option for you and your business. Take advantage of the opportunities you may miss by not securing the financing you need—contact VCF now at 804-897-1200 and start the conversation.