Types of Asset-Based Lending Services for Commercial Equipment Dealers

Adam Robinson Feb 1, 2023 10:37:37 AM

Having a steady, predictable cash flow is extremely important for a business. A scarcity of cash on hand can sink companies or put them in a hole that sets them back. Asset-based lending is beneficial for commercial equipment dealers as they attempt to expand their business and improve their balance sheets. Asset-based financing involves putting some of the company's assets up for collateral to secure a loan or business line of credit to increase its cash supply.

Asset-based lending is often the perfect solution for small and medium-sized businesses that need help obtaining financing through other means. It can be utilized to get money flowing into the company quickly. By putting assets such as accounts receivable, equipment, inventory, real estate, and other balance-sheet items up as leverage, the business may receive a loan that can be used for immediate needs – in a faster time frame than other types of loans.

Securing this type of loan offers some potential disadvantages, but by working with Finloc, it's possible to select the correct type of financing that fits your company's needs. This article will describe the type of asset-based financing available and the pros and cons of going this route.

The Different Types of Asset-Based Lending Services

Commercial equipment dealers are often a good fit for asset-based lending because of the high levels of owned inventory they can put up as collateral. For those with high levels of debt struggling to obtain a bank loan, leveraging the business's assets is a way to ensure you have enough cash. Equipment doesn't need to be sold, as the companies borrow against those assets. And the more your materials are worth, the more money you can receive in the loan, as the lender loans funds based on a percentage of the value of the collateral.

Instead of the traditional way of securing a loan or line of credit, which is often slow and drawn out, asset-based lending may get money to you quickly. Like other loans, you will have to pay off the principal payments as well as interest throughout the life of the loan. Here are some of the many types of asset-based financing available for businesses:

Equipment Financing/Equipment Loans

Commercial equipment dealers often use this financing to acquire additional new or used equipment. They can secure this asset-based loan by using the acquired equipment as collateral or other previous-owned assets. This method of financing often has a more extended repayment period because of the higher cost of buying equipment compared to other assets.

Lease Lines of Credit

Lease lines of credit are most needed if you are looking for more than one lease in the future and anticipate the need for multiple leases. Just like a credit card or business line of credit, you receive a credit cap for a short time. During this time, you work with companies to lease various equipment as long as you stay under the credit limit.

Vendor Leases (Floor Plan Financing)

Also known as wholesale finance or inventory financing, floor plan financing is a rental agreement between the business and a vendor. This lease is typically used to rent equipment from a vendor for a specified period. Companies can save money by getting access to equipment without buying it. The leases are usually flexible and can fit a specific business need.

Fair Market Value (FMV) Leases

FMV leases allow the lendee to utilize the equipment for a certain number of months until a decision is needed on whether to continue to lease, buy the asset, or return it to the lender and go in another direction. The business can purchase the item for a fair-market price at that time. The asset is not part of the balance sheet of the company.

Capital/Finance Leases

This can be like a rental agreement, where the lessee pays to use the asset but doesn't own it or get any of the economic benefits out of owning it but is still responsible for upkeep and repairs. At the end of the term, the company may have an obligation to purchase the equipment at the estimated fair value price. Unlike an FMV lease, this type of asset-based lending usually involves large payments, and the asset is considered part of the company's balance sheet.

Sale Leasebacks

In this type of agreement, the business sells the asset and then leases it back from the buyer. This allows the business to free up capital and retain access to the asset without owning it. The company receives cash from the sale while still using the asset as it could before.

Structured Financing

This can be a complex form of asset-based lending and is used for loans that traditional lenders typically do not offer. It offers solutions for those not satisfied with the structure of conventional loans and is tailored to meet the company's specific needs. Multiple complex leases may be combined into one package for the lendee to pay off. This lending is often used to finance projects that require significant upfront costs.

Accounts Receivable Financing

Money due to the company from customers may also be used as collateral for obtaining an asset-based loan. This type of financing allows a company to receive the amount that is due to them in the future right away instead of having to wait for all customers to pay off their outstanding bills. You may be eligible to borrow over 75-85% of your accounts receivable, compared to only 50-60% for the value of your equipment.

Inventory Financing

This is a short-term line of credit used so businesses can buy inventory as needed, which is often required to help smooth out seasonal fluctuations. The loan is to purchase inventory, such as raw materials. This financing method may benefit companies looking to receive volume-based discounts for large orders.

Advantages of Asset-Based Lending

How do you know if asset-backed lending is for you? It's best to determine the pros and cons before making this pivotal decision. Here are some of the most significant advantages of putting your assets up for collateral:

Ease of obtaining a loan: Getting an asset-based loan is often more effortless than other lines of credit. Businesses that may not qualify for traditional loans often turn here because the plant, property, and equipment they own offer plenty of leverage, increasing the chance the lender will approve the loan.
Put current assets to good use: Any physical resources you own, and even some other assets on the balance sheet, such as accounts receivable that are due to you, can now be put up as collateral. The lender will be more concerned with how much your resources are worth rather than how much liquid capital you have.
Faster approval: These types of loans are often approved more rapidly than conventional loans, allowing you to access money when time is of the essence. The underwriting process can be between 30-45 days, faster than other traditional types of lending.
Quick use of money: Asset-based financing comes in handy if you want to hire new employees quickly, pay off a sudden bill, or upgrade certain parts of your business soon. You now receive a more steady, predictable cash flow which can lead to greater financial stability.
Greater flexibility: With the line of credit, you now have more purchase options to expand your business, allowing you to grow in new ways. There are few restrictions on how to spend the money you receive from this type of loan, offering better flexibility in allocating the cash.
Fewer covenants: You will have to meet fewer terms and conditions while paying off the loan and may be able to pay over different time frames that are the most convenient. Having a limited business history won't be the drawback it can be when trying to procure other types of financing.
Flexible payment terms: Lenders will usually be willing to work with you, offering different options to pay off your loan. You may receive flexible repayment terms, making it easier on your cash flow. Options may include a fixed-rate or interest-only loan and may be able to be paid monthly, quarterly, or even annually.
Increased cash flow: Your worry of not having enough cash on hand is gone when the loan is approved, and you can now focus on what areas the money is most needed while helping out with any fluctuations that occur on a month-to-month basis.
Lower interest rates: The interest rates are usually lower than an unsecured loan because the lenders can take the assets if you don't pay off the loan, and they know they can recoup at least some of what is owed.

Disadvantages of Asset-Based Lending

Asset-based lending isn't the perfect solution for all businesses. They need to weigh the potential pros against some of the disadvantages that may arise:

Risk of losing assets: You may lose balance-sheet assets you have put up for collateral if you don't pay or default. The lender can seize your physical assets if you can't complete the loan payment schedule.
Not all assets qualify: You may not have enough assets worthy enough to be the collateral in the loan. The assets you own might also be too old and depreciate too quickly to the point that their value has plummeted. Different assets are worth different percentages in terms of how much loan value they are worth, so you may find that what you own isn't worth enough to get you the loan you want. You may need multiple assets as collateral if you need more than one to secure the loan.
Higher fees may apply: While the actual loan interest rates can be lower than other types of loans, there may be higher fees at the beginning of the process. Depending on the lender and loan terms, a down payment will also likely be needed.
Limited funding: Each asset will only bring in a loan equal to a certain percentage of assets, usually from 50-90%. For instance, if you own machinery worth $200,000, you may only be able to earn a loan for 60% of that, or $120,000. You may only use your business's assets as collateral, not personal assets.
May be hard to obtain: Lower credit scores may make it harder to prove that you should get the loan or line of credit, and if you do get it, it may be at higher rates and for not as much money as you were hoping for initially.
Difficult to refinance: Once the asset-based financing schedule has started, it may be tough to refinance during the life of the loan if better rates become available.
Time to get ready: Depending on your financial situation, getting together proper documentation may take time, defeating the purpose of trying to get the cash swiftly.
Inflation: Rising prices and rates mean the cost of borrowing increases while purchasing power decreases.

How to Qualify for Asset-Based Lending

Like any loan, you'll need to show the lender that you're not at a considerable risk of missing payments. The fact that your assets can be taken lowers some of the risks for the lenders, but they are still looking for the right people to do business with. Although asset-based financing can be faster than conventional ways, there are requirements you'll need to show the lender to prove you aren't a risk of defaulting. Here's some information that will help determine if you qualify:

Credit history: Like any loan, your current credit score and credit history will affect how much you can borrow and at what rate. A good score and sturdy history with few missed or late payments will give you more favorable terms. Meanwhile, credit issues from your past will hurt your chances and may result in you having to pay more throughout the loan. A minimum score of at least 600 or even 620 may be required to even get you in the door.
Collateral requirements: The more your current assets are worth, the more you'll be able to borrow. You must own the assets and not currently be leasing them. Assets you may put up for collateral include accounts receivable, inventory, equipment, and real estate. The more you want to borrow, the more you'll have to show that you own.
Financial documents: Various financial records may be needed to prove your ability to repay the loan, especially if your credit score is lower. This may include financial statements, monthly reports, business plans, financial statements, tax returns, appraisals of assets, bank statements, and proof of insurance.

Finloc Helps you find the Perfect Asset-Based Lending Solution

Growing businesses often need an influx of cash. The need may develop from the desire to hire more employees, pay off debts while facing a cash crunch, or even take advantage of an opportunity that is too good to pass up. In these circumstances, asset-based lending may be the appropriate decision to make. Like all loans, asset-backed financing comes with advantages and disadvantages. Still, if a company has resources to leverage as collateral, it can be a fast option to get cash quickly and help smooth out a bumpy ride when a traditional loan won't do.

For over 45 years, Finloc has been helping companies grow and make ends meet. Navigating through the loan process can be complicated, and choosing the incorrect company to do business with can doom your odds of receiving a loan that allows your business to tackle its needs and prosper. Finloc works with you to secure the right type of asset-based financing for you and will guide you through the process of using your coveted assets to obtain a loan. Visit Finloc to find out how their experts can help you get started on this crucial process.

commercial equipment dealers