When your business has a particular need for equipment or another asset, you want to be able to meet that need as quickly as possible. Financing the purchase often makes the most sense, but you could be faced with banks that are unwilling to make such a loan. As the economy fluctuates, banks can tighten their underwriting standards, making it harder for businesses to get loans.
What can you do when you are unable to get a bank loan? Private credit is often ready and able to meet the needs of your business and on terms that are more flexible than what banks can offer. If you are securing your loan, you’ll often find that asset-based financing through a private lender is a better option than a conventional loan.
What is Asset-Based Lending?
Asset-based loans are a specific kind of financing. The focus is on the asset itself and the income that it generates, rather than the business as a whole. The asset then secures the loan.
In many respects, this is less risky for the lender. These loans make sense when the asset is directly tied to an income stream. For example, if the purchase of equipment or an asset allows the business to grow, it is clear how the business will benefit from the purchase.
The lender will know the value of the asset if this is part of the purchase. The business will then demonstrate how this asset will provide additional income. It also adds strength to the business’s balance sheet.
For the borrower, these types of loans have particular advantages. You may need expensive equipment in order to grow but do not have the capital upfront to finance such a purchase. With asset-based lending, you pay the loan back with the income that is generated from the asset.
Even if you do have the cash to purchase the equipment or asset outright, you might be wise to keep your cash in reserve. This preserves capital in case you run into an emergency or cash flow shortage in the future. It also makes sense to preserve your cash in case the asset does not immediately generate revenue.
Advantages of Asset-Based Loans
Even if you have the capital to purchase your asset outright and are not concerned about preserving cash, there are other reasons to consider financing. In particular, asset-based loans have advantages over other types of loans.
Establishing Business Credit
If your business is newer, you may not know what your financing needs will be in the future. You could reach a point where you need a significant loan for expansion. At such a time, you will want to be able to show lenders that you can handle credit appropriately.
Loans that you have will establish your business credit profile. It will make you a less risky borrower for future loans because you will have a good repayment history.
Competitive Interest Rates
Because asset-based loans are secured, they pose less risk to the lender. The lender knows that in the event of business failure, the asset can be sold to recoup potential losses. Less-risky loans generally have more competitive interest rates than risky loans, such as a line of credit.
Lenders will know how much the asset is worth and know how quickly it will depreciate. This allows lenders to offer more flexible terms than loans that are secured by accounts receivable or other assets that fluctuate in value. You should be able to secure loans that are at a repayment term that makes sense for the asset and the income you will generate.
How Is Private Credit Different?
Banks have limitations. Each bank establishes its own loan policy regarding risk and underwriting standards. Sometimes, particularly with high-end assets such as aviation, yachts, or high-value real estate, banks are simply not suited to have such loans in their portfolios.
Banks are also burdened with financial regulations. Their loans can come with a mountain of requirements, both at closing and ongoing. Banks need to be able to show sound lending decisions in their loans, and if they don’t have a lot of experience with certain assets, they may consider the loans to be too much risk with their regulators.
Private credit, on the other hand, does not need to meet the same regulatory requirements. The financing comes from private lenders, such as high-net-worth individuals. As private investors, they see the opportunities in providing funding to businesses.
Without the same limitations as banks, private lenders are able to approve and close loans much faster. Rather than going through a rigid underwriting process, you can work with a lender who is able to be more flexible with terms and repayment.
Securing Private Credit
When you seek private credit for asset-based financing, you’ll need to prove the value of your collateral. This should typically be straightforward with either a purchase price or appraisal.
The private lender may also review your credit and business financials. However, this process will be much different than what you would experience at a bank.
You will still have some documentation, such as the promissory note, or your promise to repay the loan. The requirements for your down payment on an asset purchase may vary depending on the type of asset and the lender’s requirements.
Asset-Based Lending for High-Value Assets
Sometimes the needs of your business do not fall in line with what a bank is willing or able to lend. This can be especially true with financing for aircraft or aviation equipment, yachts, or a high-end real estate asset. Private credit may be the best solution for your business.