A Guide to Asset-based SME Loan

A Guide to Assetbased
SME Loan

Asset-based lending is a type of SME loan that uses an asset as collateral for a loan. If
you default on this loan, the lender can get the asset. Typical forms of asset-based loans
involve receivable financing, inventory financing, machinery financing, or financing of
immovable assets.
What Asset-based Lending Is
An asset-based SME loan uses your corporate assets to obtain funding for your company.
An asset is used as collateral for the loan, and the lender can repossess the pledged
asset in the event of borrower default. The most common types of asset-based lending
are invoice financing, invoice factoring, and equipment financing, which allows
businesses to capitalize on current invoices.
How Asset-based Lending Works
The lender can decide the borrowing base when trying to ask for an asset-based loan,
which is the amount that can be loaned against a given asset. The lender must carry out
an evaluation of the asset to examine the sum that can be borrowed and due diligence to
guarantee that the asset does not already collateralize a loan. If the lender considers
anything acceptable, it will accept your loan, and you will receive funding.
When you get out an asset-based loan, the fundamental asset will be used to collateralize
the loan, which means that unwillingness to make payments may result in the lender
being repossessed or the collateral being taken over. Please guarantee that your
payments are made on time and in full to prevent default.
Who Asset-based Loans Are Best For
Asset-based loans are a good funding option for small companies with existing assets
that they can pledge on a new loan as collateral. These loans also have lower criteria for
a credit score, entail less collateral risk, and can provide easier access to financing than
other lending options.
Some companies that can benefit from asset-based lending include:
● Companies with lower credit scores: asset-backed funding has lower credit score
requirements than unsecured debt requirements.

● Businesses requiring fast money: Most asset-based lending programs are set up
like a credit line; this allows you to use the working capital funds as needed without
having to apply for additional funding.
● Businesses with current assets: Asset-based funding will leverage your current
assets to allow you to re-invest the equity in your assets.
● Business owners who want less personal risk: a personal guarantee is expected
for most small business loans.
However, asset-based lending has less risk to the lender and also does not require
personal guarantees.
An asset-based loan will provide a secure way for companies to leverage their current
assets to raise their immediate cash flows. The types of asset-based loans available are
as varied as the types of assets a company may have.
In asset-based lending, every form of an asset can be leveraged; but, certain types of
assets are more frequently collateralized. Although immovable property and machinery
are popularly used as collateral, receivable inventory accounts and other tangible assets
may also be used to support small business loans.
Types of Asset-based Lending
Accounts Receivable Lending
Accounts receivable funding and servicing of invoices using the existing customer
invoices as collateral for a credit line of business. You pick the invoices you want to fund,
and the lender must advance a part of the invoice value, normally 80 percent to 90
percent.
Funding for invoices is separate from invoice factoring, which includes assigning the
invoices to the investing company. The factoring company purchases the invoices with
invoice factoring and advances you a portion of the invoice value. The investing company
then receives payment from your customers and advances the excess invoice sum less
the factor rate to you. It is important to educate yourself with common invoice factoring
errors with invoice factoring and to maintain structured financial records to account for
advancements and expenses.
Inventory Financing
Inventory financing allows use of existing or future inventory as collateral for a loan or
credit line to a small business. Using inventory as a leverage is much more difficult than

using a fixed asset such as real estate or equipment, as inventory also fluctuates. If using
inventory to back up financing to ensure the loan stays adequately collateralized, lenders
can need extra to continuous monitoring.
Equipment Financing
Equipment finance uses the equipment that you already possess or the equipment that
you buy as financial collateral. The company equipment covers the lien equivalent to a
personal car loan. In case you default on the loan, on the remaining debt, the lender can
take possession of the equipment instead of repayment.
Real Estate Financing
You can utilize your own immovable equity as an incentive to keep a loan running. It is
generally referred to as an equity loan rather than asset-based financing, though it is by
necessity a type of asset-based loan. In general, loans are provided in the form of a credit
line based on the resources of the real estate, and yet, most major banks offer commercial
property equity loans.
Financing Based on Other Tangible Assets
While far less common, assets other than those mentioned above that can be pledged as
collateral on loan. Generally speaking, if you have an asset that has value, like
receivables, and a lender is willing to acknowledge it, then you can use it to back up a
loan. Such types of transactions would require a professional appraisal to calculate the
value of the object required to be used as collateral.