In recent years, I’ve often been asked about the relatively new phenomenon of asset-backed lending. This kind of financing has become increasingly popular in recent years – largely because since the financial crisis it has become more and more difficult for many small and medium-sized companies to access the extra funds they need in the form of unsecured loans.
So, I thought it might be valuable to share a few of my ideas about the pros and cons – as I see them – of this method of financing.
Before I do, however, it’s probably worth just reminding ourselves quickly of what asset-based lending is – and how it’s different to other ways of funding your business.
A new kind of secured loan
Asset-based lending is a financial loan that is secured against assets within your company – as opposed to an unsecured loan that has been given to you by a financial institution purely on the basis of your credit-worthiness. It’s become a common way for many companies to access cash when they need it most – the most common examples of companies I’ve seen using it have been ones who have experienced rapid growth. Asset-based lending is popular in those situations where a company is growing and business is booming – but the cash flow just isn’t there when it’s required to keep everything running day-to-day. It can be a really useful way of getting the working capital your company needs to grow and take your enterprise to the next level.
Which is all well and good – but what do I really think of asset-based lending as a way of financing your company? Well, to me it seems that it offers a number of clear advantages over other methods.
A streamlined process
One of the biggest advantages of asset-backed lending, as I see it, is that it is usually considerably less hassle to secure than other forms of financing. That’s not to say that the lenders don’t do their due diligence – they should, and they do – but the whole process is generally quicker and involves less paperwork than you might find when you’re trying to borrow using a conventional loan from another financial institution. This is particularly appealing to those of us growing businesses in the current economic climate, where many financial institutions are less willing to hand out unsecured loans than they were a few years ago.
Money when and where you need it
The second advantage of asset-backed lending is that is can help your company to grow, more predictably and sustainably, by giving you the cash you need to run your business effectively day to day. So, instead of being pushed and pulled by the vagaries of an uncertain cash flow, having a bit of extra liquidity using this method can represent a real helping hand. I’ve been there, during the difficult early days of a new company, and sometimes you just need to have a little bit of breathing space. That space really is vital, because it allows you to grow properly, and in a healthy and sustainable way. Think of asset-based lending in this sense as way of buying a new, bigger pot for your young plant.
A flexible solution
I’ve also been very impressed by just how flexible this kind of lending is too. You can secure asset-based lending against all sorts of assets – that income you get from clients who pay regularly and reliably into your accounts receivable is just one such asset – but it could be anything from buildings, vehicles or other equipment. And once you’ve got the funding, you can then use the money however you need to (within the business, obviously), and if your business grows, then your line of credit will usually grow too (especially if the asset it is secured against is your accounts receivable).
So – if your business is experiencing rapid growth, or you’re simply having trouble getting an unsecured loan in the current climate, I’d highly recommend investigating asset-based lending. It seems to be a method of financing that’s particularly well-suited to the fast-paced and dynamic industries I operate in, where the great progress your company is experiencing can sometimes outstrip the cash flow you have available. I believe it really can be the perfect way to get that all-important breathing space we all need sometimes.