Funding Post-Pandemic Growth Through Asset-Based Lending

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Funding Post-Pandemic Growth Through Asset-Based Lending

SME lending on these shores surged through 2020, with this increased driven primarily by government-backed Covid-19 loan schemes.

Data from the Bank of England (BoE) revealed that such lending increased to £103.7 billion against the backdrop of the coronavirus pandemic, with this figure up by a staggering 82% when compared with 2019.

For businesses that want to pursue more flexible lending solutions, asset-based lending offers a particularly viable solution. But what exactly is this and what are its main advantages? Let’s find out.

What is Asset-Based Lending?

As the name suggests, asset-based lending describes a scenario where businesses are able to borrow capital by using their corporeal assets as collateral.

This is a secured lending model that uses assets to secure lines of credit at potentially lower rates of interest, while it’s incredibly accessible and enables applicants to borrow money in a way that best suits them.

But what types of assets can be used to secure loans? The largest and most commonly deployed assets are commercial property and owned equipment, while inventory (such as clothes in the case of retailers), accounts receivable and potentially intellectual property may also be used to secure loans.

Can Asset-Based Lending Fund Business Growth?

Typically, asset-based lending enables applications to borrow flexible sums of cash, depending on the value of their assets and how they intend to deploy them.

This makes the lending model ideal for funding commercial expansion, although the use of key and strategic assets as collateral introduces an element of risk that must be factored in.

Certainly, businesses pursuing growth will need to balance the need to borrow against the risk of using certain assets of collateral. For example, an asset-based loan secured by accounts receivable is considerably safer than one that uses property as collateral, although that can be borrowed will be much lower in this instance.

So, it’s important to balance how much capital is required and the precise development stage of their business before entrepreneurs decide how to proceed.

What Are the Advantages of Asset-Based Lending?

As we’ve already touched on, one of the main benefits of asset-based lending is that this affords applicants access to lower rates of interest.

This is because the use of collateral allows lenders to minimise their risk, creating favourable rates and repayment terms overall.

Because of this, asset-based loans are typically easier and quicker to obtain than unsecured loans and formal lines of credit, with this particularly attractive to smaller businesses faced with the prospect of rapid growth.

This type of loan also includes fewer covenants on average, which translates into fewer clauses and less requirements being imposed on the borrower.