Since the financial crash of 2008, banks have significantly tightened their lending criteria. Unless your business is established and profitable, your cash flow is impeccable, your credit score is above reproach and you have reams of paperwork to support your application, chances are a request for a business loan will be met with the computer saying no.
So where does this leave you if you’re operating a start-up with great potential but without much of a track record? Well, if your business owns a few assets, there could be a very easy answer.
All about asset-based lending
In simple terms, asset-based lending involves approaching an alternative lender and negotiating a loan using your business assets as collateral. This significantly reduces the lender’s risk, as they can seize the asset should you fail to repay – and, equally importantly, should significantly increase your chances of acceptance.
What assets can you use? That’s up to your lender, but at Cashsolv we’re pretty flexible and we’re happy to consider property, plant, equipment or stock. Opt for invoice factoring or discounting and you can even borrow against your unpaid invoices – but more of that later.
Why opt for asset-based lending?
Whilst asset-based lending is slightly riskier than an unsecured loan (fail to repay and you lose the asset), chances are you’ll be able to secure this type of credit when a bank loan is out of the question. This is particularly true if your company falls into one of the following categories.
1 Your business is relatively new
Banks rank stability as a key criterion when negotiating loans, and regard start-ups as inherently risky. With asset-based lending, it’s the quality of your collateral that is important, rather than your trading history.
2 Your credit score is comprised
A perfect score can be pretty difficult to obtain, but unless you’re in the upper reaches you’re unlikely to be offered favourable terms by a bank. This is a double whammy for new companies, as no credit history is as unfavourable as a poor credit history.
3 You’re growing fast
This sounds wilfully perverse – surely banks want to invest in growing businesses? They do, of course, but they’re also acutely aware that rapid growth can be very risky from a cash flow standpoint: your company will need to invest in new people, processes and raw materials to service new account wins – before you get paid. To an alternative lender, growth is straightforwardly good.
4 You don’t have the time to jump through hoops
Even if you can obtain a conventional bank loan, you may not have the time to go through a labyrinthine approval process. Collating your articles of incorporation, balance sheet, three years’ profit and loss statements, bank statements and three years’ tax returns – not to mention writing a persuasive business plan – all takes time that you could better devote to growing your company. With an alternative lender like Cashsolv, the application process is much more streamlined – and you should get a decision much faster.
What assets can I borrow against?
In short, if it’s a physical object with a significant value there’s a good chance you can use it as collateral. Lenders will generally favour assets that can quickly be converted into cash, and every lender will have its own specific loan criteria, but in general five types of asset would usually be appropriate.
If your company owns rather than leases its premises, that places you in a very strong financial position as a potential borrower. The first step is to arrange a valuation to discover your property or land’s market worth. Of course, if the property is mortgaged then you’ll need a considerable amount of free equity to move forward, as your mortgage company will have first rights over their portion of the asset.
2 Plant and equipment
Whether it’s your manufacturing equipment or your IT installation, anything that your company owns outright can be used as collateral. In short, if it has a cash value, then it’s ideal for asset-based lending. Again, a word of warning: if you already have finance outstanding on the asset then it’s ineligible, and the equipment needs to be owned your business, not you personally.
If your company is in the distribution business, chances are you have a fleet of vans or lorries. If it’s not, then you may still have one or more company cars. Provided the business owns them outright, they can be used as security for an asset-based loan.
4 Stock and inventory
If you supply a tangible product (rather than a service) to your customers, chances are you have significant holdings of stock on hand at any time. In time, that stock will be sold, but in the meantime it’s a balance sheet asset that can be used as collateral. Naturally, your lender will wish to determine the stock’s current market value, and assess how quickly it could be sold if the need arose.
This brings us back to invoice factoring and discounting – which can be regarded as the gift that keeps on giving if you have recurring cash flow problems. These innovative solutions allow you to borrow against the value of your invoices, the instant you issue them – at Cashsolv, we’ll let you borrow up to 85%.
Repayment is made when your customers pay you, meaning you can borrow and repay time and again – in fact, every time you issue an invoice. This can provide exceptional peace of mind if you have major customers who pay reliably but slowly.
With factoring, the finance company takes control of your debtor ledger and assigns experienced credit control professionals to secure early payment, thus minimising your interest. With invoice discounting, you retain control of your debtor ledger, so your customers do not find themselves dealing with a third party.
To discover how Cashsolv can make asset-based finance work for you, please contact us.