What Type of Assets Are Used in Asset-Backed Funding

Struggling to secure funding can be a major roadblock for businesses, especially when growth opportunities arise. Traditional loans often involve lengthy approval processes and require a strong credit history. 

Here is where Asset-backed funding offers a compelling, fast business funding solution. By using your valuable assets as collateral, you can secure funding options that are quicker and potentially more flexible than traditional loans. This approach injects capital into your business and frees up cash flow for vital operations and strategic investments. 

This blog explores the world of asset-backed funding, exploring the various types of assets that can be used to fuel business growth and achieve financial goals.

Understanding Asset-Based Lending

Asset-backed funding falls under the umbrella term of asset-based lending (ABL). This financing method allows businesses to leverage assets to secure fast business funding. Unlike traditional loans that primarily focus on credit history and profitability, ABL emphasises the value and liquidity of your assets.

Here’s the core concept: you borrow money using your business assets, such as inventory or accounts receivable, as collateral. The lender assesses the value of these assets and determines a loan-to-value (LTV) ratio. This ratio dictates the maximum loan amount you can qualify for, typically ranging from 50% to 80% of the asset’s value. [1]

The beauty of ABL lies in its speed and flexibility. Compared to traditional loans with lengthy application processes, ABL can provide quicker access to capital, often within a few weeks. Additionally, ABL structures can be tailored to your specific business needs, making it a dynamic solution for businesses experiencing growth spurts, seasonal fluctuations, or unexpected funding requirements.

Types of Assets Used in Asset-Backed Funding

Partnering with an asset-based lender offers a versatile approach to fast business funding by unlocking the potential of various assets in your company’s books. Let’s explore some of the most common asset categories used to secure financing: [2]

1. Accounts Receivable (AR)

Accounts receivable (AR) represent the outstanding invoices your customers owe for goods or services delivered. They essentially represent future cash flow waiting to be collected. AR financing allows you to leverage this future income as collateral for a loan.

There are two main ways to utilise AR for fast business funding:

  • Factoring: You sell your accounts receivable to a factoring company at a discount. The factoring company then collects the payments from your customers and remits the remaining amount to you, minus their fees.
  • Invoice Discounting is similar to factoring, but you retain ownership of the invoices. The lender advances you a portion (typically 70-80%) of the invoice value upfront, and you collect the full amount from your customers. Once collected, you repay the lender the advanced amount and a discount fee.

Important Considerations

  • Quality of Receivables: Your customers’ creditworthiness plays a crucial role. Lenders prefer low-risk accounts with a high probability of timely payment.
  • Collection Risk: Be mindful of the collection process involved. Sometimes, you might be responsible for collecting customer payments if they default.

2. Inventory

Inventory, including raw materials, work-in-progress, and finished goods, can also be collateral for fast business funding. This approach allows you to finance the purchase of inventory and support growth initiatives without depleting your cash reserves.

Here are two common types of inventory financing:

  • Floor Planning is ideal for businesses that sell physical products. A lender provides financing secured by the inventory held for sale. This allows you to purchase more inventory upfront, potentially at a discount, and repay the loan as you sell the products.
  • Warehouse Financing is similar to floor planning, but the collateral is stored in a public warehouse controlled by a neutral third party. This option offers lenders greater security, potentially leading to more competitive loan terms.

Limitations of Inventory Financing:

  • Fluctuating Value: The value of inventory can change rapidly, impacting the amount of credit available.
  • Marketability: Certain types of inventory may be less marketable or take longer to sell, affecting the loan’s viability.

3. Machinery & Equipment

The machinery and equipment used in your day-to-day operations can also be valuable assets for securing fast business funding. This option is particularly suitable for businesses that rely heavily on specialised equipment for their core functions.

Challenges to Consider

  • Depreciation: The value of machinery and equipment depreciates over time, impacting the loan amount you qualify for.
  • Specificity: Specialized equipment might require specialised lenders with experience appraising and valuing such assets.

4. Real Estate

This property can be a powerful tool for securing fast business funding for businesses that own commercial real estate. There are two main ways to utilise real estate for financing:

  • Commercial Mortgages: Similar to residential mortgages, a commercial mortgage allows you to borrow money using your commercial property as collateral. This option provides access to significant capital for expansion, renovations, or equipment purchases.
  • Construction Loans: Construction loans can be an attractive option if you’re looking to acquire or develop new commercial property. These loans are secured by the future value of the completed property and provide funding throughout the construction process.

Considerations for Real Estate Financing

  • Property Valuation: A professional appraisal is crucial to determine the accurate market value of your property, impacting the loan amount.
  • Market Fluctuations: Like any investment, real estate values can fluctuate, potentially affecting your loan terms.

5. Intangible Assets

While less common, some lenders might consider intangible assets like intellectual property (IP) for asset-backed funding. This category could include patents, trademarks, copyrights, or brand recognition. The value of these assets can be more subjective, so specialised lenders with expertise in valuing intangible assets are typically involved.

Choosing the Right Assets for Fast Business Funding

Selecting the right assets for securing fast business funding depends on several factors specific to your company. Here are some key considerations:

  • Asset Type: Evaluate the liquidity and convertibility of your assets into cash. Receivables and inventory might be readily available, while real estate conversion takes longer.
  • Risk Profile: Consider the inherent risk associated with each asset. Fluctuating inventory values pose a higher risk than stable receivables from reliable customers.
  • Business Needs: Align your choice with your funding goals. AR financing might meet short-term needs, while real estate-backed loans could benefit long-term expansion plans.

Consulting with a financial advisor experienced in asset-based lending can provide valuable insights and help you tailor a solution that best suits your business situation.

Fast funding doesn’t have to be a complex process. Fast Fund offers a streamlined approach to asset-backed financing, helping you unlock the potential of your assets and secure the capital you need to achieve your business goals. Contact us today to explore your fast funding options!

Conclusion 

The world of asset-backed funding offers a diverse toolbox for businesses seeking fast and flexible access to capital. Various assets can be leveraged to fuel your growth, from readily available receivables to substantial real estate holdings. By understanding the strengths and limitations of each option, you can make informed decisions to unlock the potential within your company’s asset portfolio. Explore the possibilities of fast business funding and propel your business towards its full potential.

FAQs

What assets can be used by a company toward asset-backed loans?

Companies can leverage various assets for asset-backed loans, including accounts receivable, inventory, machinery & equipment, and even real estate. The loan amount depends on the asset’s value and liquidity.

What are the three major types of asset-backed securities (ABS)?

Three major ABS types are mortgage-backed securities (MBS), auto loan-backed securities (ABS), and credit card ABS. Each is backed by a pool of underlying assets, such as mortgages, car loans, or credit card receivables.

Which of the following types of assets can be used as collateral for an asset-backed securitisation?

The above (accounts receivable, inventory, equipment, real estate) can be used as collateral in an asset-backed securitisation. However, the specific types may vary depending on the issuer’s and investor’s appetite. [3]

What is an asset-backed fund?

An asset-backed fund pools investors’ money to purchase asset-backed securities (ABS). These funds offer investors exposure to a diversified pool of assets while potentially generating regular income.

References

[1] https://www.investopedia.com/terms/a/asset-backedsecurity.asp 

[2] https://corporatefinanceinstitute.com/resources/accounting/types-of-assets/ 

[3] https://www.investopedia.com/terms/a/assetbasedlending.asp