How to Use Asset-based lending to finance your accounts receivable

Did you know you can use Asset-based leading to finance your accounts receivable? When your cash flow temporarily falls short of your requirements, you can use several options to bridge the gap. You could apply for a loan, but that takes time and is not always attainable. Invoice factoring is another option, which is far easier than a traditional line of credit. Another option is asset-based lending. With this option, instead of selling your receivable invoices as you would with invoice factoring, you can take a loan against the value of some of your other assets, such as equipment, inventory, or real property. Let’s take a look at how asset-based lending to finance your accounts receivable works.

A short guide to asset-based lending

Asset-based lending is simply the practice of using one or more of your assets to secure a loan. This asset could take any number of forms.  Your accounts receivable, stocks and bonds, equipment, real estate, and more are some forms of your assets. Asset-based lending is considered less risky by lenders, than an ordinary bank loan or instruments such as credit cards. The reason for this is that the lender is likely to recoup at least some of their money if the borrower should fail to repay the loan.

An interesting point to remember is that the more liquid the asset, the less risky it is. A building may seem like an excellent piece of collateral against a line—and it is, for the most part. However, it is illiquid. The lender would need to sell the property to get their money back. Then, the market will determine whether the sale will cover the full amount of the loan.

Asset-based lending commonly works with a loan-to-value ratio. If a lender says that they are prepared to offer an 80% asset-based loan against your accounts receivable, it means that it will grant you a loan of 80% of the total value of your current outstanding invoices. As a rule, the more liquid the asset, the higher the loan-to-value ratio. The liquidity of your accounts receivable depends, for the most part, on the creditworthiness of your clients. If the lender sees that your clients have a good payment history, they will grant you a higher percentage of your accounts receivable as a loan. 

Kore Capital Corporation specializes in providing short-term capital to small businesses. For more information on our line of credit, government contract financing, inventory factoring, or invoice factoring solutions, contact us today.