A recent study found that only 16% of small and medium enterprises consider asset-based finance while looking for financing. On the other hand, about 79% of small business owners look to banks for loans. The disadvantage is that most traditional banks have high interest rates.
Moreover, banks need collateral, meaning most loan requests from small business owners are declined. However, unapproved loan requests should not mean an entrepreneur’s dream dies. Other methods of financing are available if only business owners choose to divert from conventional financing methods.
One of the best solutions today is asset based financing. But what does this entail, and how can itbenefit SMEs?
What is Asset-Based Finance?
In business, asset-based finance is a form of financing that allows business owners to use movable assets as collateral when applying for loans. These movable assets include:
• Vehicles
• Equipment
• Receivables
Traditional banks only accept immovable assets, such as buildings and land, before they can approve loans. Such policies limit young individuals from establishing businesses because they don’t own such assets.
Businesses that involve agriculture are also disadvantaged because institutions don’t regard agriculture as a viable enterprise due to high risk.
Forms of Collateral for Asset-Based Finance
Asset-based finance is flexible. Institutions that offer such financing are open-minded and consider what the borrower has as collateral before dismissing their loan request. As such, the following make up asset-based finance:
1. Warehouse Receipts
Unlike traditional banks that require title deeds to prove land ownership, warehouse receipts are feasible in this type of financing. When a business owner presents warehouse receipts, it is evidence of ownership of commodities. Therefore, the receipt is usable as a pledge when applying for a loan.
2. Accounts Receivable Financing
Every legit business issues invoices to its customers. Invoices are evidence that the enterprise is active and legit. The document indicates the products sold, their quantities, and the amount of money the seller demands from the buyer. Therefore, the financier can use the borrower’s outstanding invoices as collateral.
3. Purchase Order
Buyers place a purchase order to suppliers to indicate the quantities, types, and prices of products. The purchase order acts as an offer from the buyer to the seller. It also outlines when the buyer will make the payment.
4. Leasing
In this case, the financier takes over the asset presented by the borrower. The financial institution then allows the borrower to use the asset, such as equipment, in exchange for regular payments.
5. Factoring
In this form of asset financing, small businesses sell their invoices to the financier. Afterward, the financier, also known as the factor, gives the borrower a percentage of the funds they expect to receive. The responsibility of collecting funds then remains in the hands of the financier.
Benefits of Asset-Based Finance for SMEs
Most business owners are familiar with bank loans and overdrafts. However, the business world is evolving, paving way for non-conventional financing. Advantages of asset-based loans include:
• Flexibility
• Less difficult to acquire than bank loans
• They have better liquidity
• Asset-based loans are quick to obtain
• These loans have less complicated contracts
• They have lower costs
If you’re a small business owner, you understand the importance of stress-free and low-cost financing. Banks demand more than you can offer. As such, your chances of getting bank loans are lower. Instead of shelving your business idea, turn to asset-based finance. The contracts are simpler and more flexible for SMEs.