If your business has a good mix of tangible and intangible assets, an asset based loan can be a great way of accessing working capital. You can use the funds from asset based loans to purchase inventory, finance accounts receivables, or even hire additional staff.
Like other forms of financing, there is a process when applying for an asset based loan. Here are some thoughts on how to improve your chances of approval. Consider these 5 steps when applying for an asset based loan.
1. Prepare a Sound Business Plan
While asset based loans are secured by company assets, lenders will still need to know how you plan to use the additional funds. Additionally, it is important that you not only have the assets to support the loan, but also the cash flow from operations to make the monthly payments. Therefore, prepare a business plan that includes how the funds will be used, your vision for growth, and a clear path to success using the borrowed funds. Lenders need to clearly understand the use of funds and how they are going to benefit and grow the company going forward.
A sound business plan inspires confidence in the lender and will help you secure a more competitive rate. In some instances, as is the case with contract financing, you can negotiate flexible repayment terms based on the cash flow of the contract because the lender understands your goals and how you plan to achieve them.
A solid business strategy will also open doors for establishing a long-term relationship with the lender. In this way, you can access future lines of credit whenever you need additional funding.
2. Value Your Assets
Asset based lenders typically accept both tangible and intangible assets as collateral. However, lenders prefer liquid assets such as cash, securities, and inventory items that are easy to sell. Accounts receivables with quick payment cycles are also valuable assets.
Additionally, lenders may consider the long-term value of fixed assets such as real estate, business equipment, and even office furniture. Conduct a thorough valuation of your assets as you prepare your application. Determine how quickly your fixed assets depreciate, and provide an honest assessment backed by an independent appraiser.
It’s not uncommon for lenders to assign a lower value to your assets than you expected. Asset based lenders will lend a percentage against the “cost value” or “liquidation value” of the assets to minimize their risk. It is important to understand that asset based lenders are not equity investors, they are debt providers. As such, they look to the the value of the assets being used as collateral and the cash flow of the company. They are not in the market to provide funding for the promise of future returns and ownership interest, like equity firms are. It is a common frustration our clients have when they first start exploring asset based loans. The expectation is that they will receive debt priced financing with an equity investment structure. This, unfortunately, doesn’t exist.
3. Prepare your Business Documents
In addition to having a sound business plan, prepare supporting documents that shed light on the state of your business. Asset based lenders typically will request the past two years of tax returns, year-end financial statements, current interim financial statements, past 6 months of bank statements and your accounts receivable and accounts payable aging reports. If you are using equipment or inventory as collateral, they will need an estimated value of each. Appraisals on real estate and evaluations on inventory and equipment are required as part of the lender’s due diligence.
You will also need to provide identification documents for yourself and your business. These documents may include articles of incorporation, a brief description of business operations, and your driver’s license.
4. Negotiate Terms
Because asset based loans are a form of secured financing, lenders are not boxed in to defined parameters and terms are negotiable. Often times, rates, terms, fees and loan structure are negotiable. There is more room to negotiate when your debt service ability (ability to make the monthly payments) and asset quality are high. In an inventory financing or accounts receivable financing scenario, you can negotiate discounted terms from suppliers if you have the cash on hand to cover your cost of goods. Discounts of 2%/10, N30 are common and a reduction in your cost of goods, partially offsets your cost of capital. This is how the majority of our clients mitigate the finance cost and leverage their companies in a responsible way to facilitate their growth.
You can negotiate rates, terms and fees with the lender and then negotiate discounts with your suppliers in exchange for early payment.
5. Catch Up on Your Accounts Receivable
If the majority of your accounts receivable are aged past 60 days, this will have a detrimental effect on the lender’s decision. Regardless of the type of asset based loan being requested, lenders analyze the accounts receivable to measure the cash flow cycle of the business. If your accounts receivable are stretched, it could indicate future cash flow problems. Lenders like to see that the accounts receivable are being collected within industry norms. Additionally, your accounts payable should be paid as promptly as possible and always be less than your accounts receivable. If your accounts payable are larger than your accounts receivable, this is referred to “negative working capital” and is a red flag in the credit review process. Simply put, your company owes more money than it is collecting and this is a concern for all lenders.
In an accounts receivable asset based loan, collection days and collection percent are closely reviewed. The lender wants to know that you have control of the credit you are extending to customers. Collection within terms and collected amounts equal to the amounts billed are key indicators of asset quality. If your accounts receivable are stretched this could be an indicator that your customer credit profile is poor. Deductions taken on the amounts billed could point to poor product quality and customer dissatisfaction. Both items are areas of concern for the lender and weigh heavily on their credit decision.
Are you ready to apply for an asset based loan and grow your business? Huntington Coast Capital can help. We’re your one-stop resource for asset based funding, working to connect businesses with funding options that enable entrepreneurs to achieve their goals. Contact us for a consultation today! Apply online or call at 844-239-2632 to discuss your business growth plans!