Asset-based lending is a modern financing option that helps businesses increase available working capital. This type of financing is easy to use and easy to qualify for, even if your business has less-than-ideal credit. That said, you need to have available collateral for the loan. What kind of collateral can your business use?
What Is Collateral?
Collateral refers to assets you own that act as backing for a loan. In a way, using collateral is like giving the lender a guarantee that you’ll pay back the money. This lowers risk and makes it easier for small businesses to qualify.
What Kind of Equipment Works for Asset-Based Lending?
Every lender has different requirements for collateral, but many are flexible when it comes to the specific types you can use. One important factor is that it needs to be something easy to sell. For example, heavy machinery or construction equipment are excellent assets for ABL financing, but they need to be in good working order.
Other types of equipment work as well, as long as there is demand for them in the local market. You can use restaurant equipment, medical diagnostic equipment, prep surfaces, office equipment and other high-value items. Point-of-sale terminals are another option. Some lenders accept computer systems, but others avoid them because of the rapid devaluation of certain types of technology.
What Other Business Assets Can You Use for ABL Financing?
Retail businesses, distributers and B2B companies can turn to inventory as a source of collateral. You can use the value of raw materials, finished products and other goods. Another source of capital are your accounts receivables, though these are often used specifically in AR financing or invoice factoring.
You can also leverage real estate for your loan. This includes residential properties you own and commercial properties, including self-storage and warehouse space.
Which Type of Assets Should You Use?
Selecting your collateral carefully for ABL financing is important. On the one hand, you want to improve your cash flow and have money to invest in your business. On the other hand, it’s smart to avoid risking essential assets for your company’s functioning. For example, a construction company may not want to risk the only piece of heavy machinery owed, especially if it’s the primary driver of revenue for the business.
On the other hand, selecting machinery that is used only infrequently is an excellent way to turn your assets into immediate capital for cash flow. With plenty of financing, you can grow your business.