Asset Based Lending Takes Off

Business owners are having a tough time getting a conventional small business loan. Even credit cards, which have been used by business owners to help fund business expenses have cut their credit limits, making it hard to find funding. Many are turning to asset based lending companies as a form of alternative financing. These types of lenders include merchant cash advance lenders, banks making secured loans with direct assets, and factors. The costs to engage this lending may be higher, but in a time when some credit is better than no credit, the rate of financing in alternative asset-based loans has increased 8% in 2008, as explained by the Commercial Finance Association.

Factors

Selling your accounts receivable to a bank or lender in exchange for credit upfront is factoring. Costs to establish such an account can add up to 20% or more. It has been used in the past for businesses that didn’t have hard assets, but had a great deal of billing to collect representing a large positive accounts receivable in the future. Professional services like lawyers offices and design consultants might qualify for this type of alternative asset-based lending and can help them access more credit during the down turn.

Merchant Cash Advances

These loans are similar to factoring, but they use credit card receivables that are expected in the future instead of accounts that haven’t been paid yet, but are on the books. A merchant cash advance lender will review a business to see if they have enough credit card receivables to merit a loan, and that loan is paid back as a percentage of each future sale they make via the credit card equipment installed. It is great for restaurants that do a lot of business in credit card receivables, but might need a loan to expand or buy equipment. Without any other asset, this is one way to use their future gains to help them get credit.

Secured Asset Lenders

These come from more conventional sources, like banks. However, they can use anything from a boat to a work of art to secure a loan. The value of the asset is appraised and then a loan might be made against that value. If the borrower defaults, they lose the asset. It’s a pretty simple way to get credit for something of value that you won outright.