Asset Based Loans
Both small and large business can consider asset-base loans, which are based on the value of hard assets, receivables and inventory for determining borrowing limits. The amount of money available is generally based on a formula. Pros: Asset-based lending is flexible, since you can use accounts receivable and inventory as collateral. If your company has less-than-perfect credit, asset-based lending could be for you especially if you find a lender who specializes in your industry. You may also be able to access capital more rapidly than through a loan based on operating income and other financial measures. Cons: One of the drawbacks to an asset-based loan is the formula. One example: If you are only allowed to borrow on accounts receivable less than 90 days old. If you are not paid by then, you will need to pay back that portion of the loan anyway. In addition, if the assets reduce in value, you may own more than those assets are worth. Plus, lenders discount assets when determining how much they will loan to your business. For example, a lender may not loan anything against foreign receivables, 50 percent of the value for work in progress and perhaps 80 percent of the value of U.S. receivables.