Asset-based lending rates are essential information for business owners considering this financing solution. The good news is that you can find attractive interest rates through this financing option. But the rates will vary widely based on the lender and the specifics of your loan.
Key Points:
- Asset-based lending involves loans granted based on collateral. If the borrower defaults, the lender can seize the collateral asset to recoup its costs.
- Asset-based loan rates vary based on the type of collateral you provide.
- Asset-based lending rates vary based on the small business and the lender. But in general, you can expect a range from 5% to 15%.
- This financing solution could be the right opportunity for your small business needs.
What is Asset-Based Lending?
Asset-based lending is a loan agreement where the borrower secures the loan by providing collateral. You might also wish to explore what is asset financing.
Collateral: Collateral can be an asset with a value the lender accepts as security for the loan.
Examples of collateral: Acceptable collateral varies based on the lender, but it can include inventory, accounts receivable, equipment, vehicles, and real estate.
Less risk for the lender: If a borrower defaults on the loan, the lender can sell the collateral asset to recoup their losses.
How Asset-Based Lending Works
If your business has tangible assets, then asset-based lending is a viable solution. Here’s how it works:
Evaluation of assets: Lenders will evaluate your business’s assets to determine a loan amount based on that value.
Loan amount: You won’t receive a loan amount for the entire value of your asset. Instead, a loan-to-value (LTV) set by the lender will come into play.
LTV varies based on the asset: Lenders prefer highly liquid collateral, like securities, that can be converted to cash quickly. The more liquid an asset, the more likely it is you’ll see a higher LTV offered.
Common LTVs: Lenders each set their own LTV offerings. But in general, you can expect 80% LTV on real estate, 70% on accounts receivable, and 50% on inventory.
What Are Asset-Based Lending Interest Rates For Small Businesses?
Asset-backed loan interest rates have a wide range.
Range: You can find asset-backed loans with interest rates from 5.25% to 15%.
Loan structure: You’ll find both line of credit and term loan opportunities for asset-backed lending.
Let’s explore the various factors that can affect your interest rate:
Quality and size of clients: Invoices sent to large companies with a good track reputation can command a higher LTV than smaller invoices sent to unknown companies.
Previous payment history: If your clients have a strong payment history, that can help you unlock a higher LTV.
Payment terms: The payment timeline for your clients can have an impact. A shorter deadline is preferred.
Inventory turnover: The speed at which you sell your inventory will impact your financing terms if using inventory as collateral.
Profitability: A positive cash flow isn’t strictly necessary for asset-based lending. But it can help you tap into lower interest rates.
Condition of equipment: If using equipment as collateral, the condition will matter. Well-maintained equipment is worth more than outdated equipment.
Business credit score: Even with assets, a good credit score will bolster an asset-based loan.
Appraised value: The lender will appraise the value of any collateral you use. Consider the various types of collateral for loans. If you disagree with their evaluation, then consider asking for their reasoning.
Advantages of Asset-based Lending
Asset-based lending is one loan option for small businesses. But it comes with plenty of advantages, including:
Faster turnaround: Typically, these loans are quicker to obtain than unsecured loans. It might take less than four weeks to receive the funds.
Limited rulebook: Unlike other types of loans, asset-based lending doesn’t have as many federal rules. With that, lenders have more flexibility on the terms they can offer.
Better interest rates: The collateral you use to secure an asset-based loan lowers the risk for the lender. And with that, you’ll often find lower interest rates as well.
Spending flexibility: You can use the funds from this loan type however you see fit.
Retain control: You won’t have to give up the equity in an asset for this type of loan. Instead, you can maintain control of the asset.
Fixed-rate loan stability: Many asset-based lenders offer fixed-rate loan solutions. The regular monthly payment allows you to make plans for your business efficiently.
Cash influx: Even if your business is asset-rich, you may need a cash influx to regular cash flow. Asset-based lending allows you to leverage the value of assets you own outright.
What Are The Risks of Asset-Based Lending?
As with all loans, there are also risks to consider.
Hard credit check: Most lenders will require a hard credit check, which can ding your credit score.
Fees: If you want to pay off the loan early, you’ll likely face a penalty.
Loss of collateral: If you default on the payments, the lender can seize the collateral asset.
What Type Of Collateral Is Used For Asset-Based Lending?
The types of collateral you can use will vary based on the lender. But here’s a look at some of the collateral options:
Accounts receivable
Inventory
Purchase orders
Machinery
Equipment
Commercial real estate
Marketable securities
Company vehicles
Cash
Intellectual property
Frequently Asked Questions (FAQs)
Have more questions about asset-based lending rates? Here are the answers you need.
