When you need capital, you have several ways of obtaining it from lenders, including small business loans, working capital loans, and alternative financing. Asset-based lending is a type of alternative financing that provides a cash advance based on the value of a business asset. What are the advantages of using asset-based financing instead of traditional loans?

Simple Loan Qualification

Conventional loans have a difficult reputation with small business owners. They have strict requirements when it comes to your credit rating, annual revenue, time in business, and overall finances. Even with good credit, you still may not qualify.

With asset-based loans, the approval process is much simpler. Even businesses with past credit issues may be able to qualify without too much hassle. If you’re thinking this sounds too good to be true, it’s not. There’s a reason why assets simplify qualifying.

By giving the lender a guarantee in the form of collateral, you reduce the lender’s risk significantly. In turn, the requirements to get approved are lower, and you can qualify for better terms than you normally would.

Debt-Free Capital

Before explaining this part, it’s important to mention that there are several variants of asset-based lending. They differ depending on the type of collateral used and whether the asset is sold or not.

For example, invoice factoring involves selling accounts receivable to a lender. On the other hand, equipment financing takes the equipment you’re buying as collateral for the loan itself. Merchant cash advance financing is another option, providing an infusion of capital right away in exchange for a percentage of credit card payments in the future.

Several of these options give you working capital based on your assets, so you don’t incur any debts. True, you still need to make sure you can maintain a healthy cash flow with your revenue, but avoiding debt is a relief for owners.

Fast Approval

Last but not least, ABL financing is a huge help when you need funds quickly. If you urgently need to make a large inventory purchase or must cover an emergency, an asset-based loan can protect your business. Getting approved for these short-term funding options usually only takes a few days to a week.

The Bottom Line

Asset-based loans aren’t ideal for every business, but they’re useful for many companies. As long as you use ABL financing as a tool rather than a crutch, your business can grow in size and revenue with minimal hassle.