Huntington Beach, CA Asset based loans are a popular alternative to traditional bank loans. Business owners use their assets which typically consist of inventory, equipment and accounts receivable to name a few as collateral for an asset based business loan. However, having the collateral alone doesn’t qualify you for an asset based loan.
What else is needed to qualify for an asset based loan? Cash flow. Many times, business owners spend a good portion of their capital on inventory needed in their business. The inventory is sold to customers creating revenue which turns in to net income after all expenses are paid and the cycle repeats. The problem happens when the inventory is slow moving causing the cash of the company to be locked up in the goods held as inventory. As we know, inventory sitting on the shelf in the warehouse is not creating revenue. It needs to be sold or turned in order to generate cash flow which is the life blood of any business.
Companies that can not demonstrate the ability to pay the monthly payments on an asset based loan will not qualify. One half of the equation is having the collateral, the other half is having the ability to make the monthly payments and afford to take on the additional debt.
Sounds elementary, however, business owners often only look at one side of the equation. Asset based loans can work for both business and real estate purposes, but you have to have adequate income to justify the lender giving you the loan.
If the company does not have the income to cover the asset based loan payments, they will need to seek an equity investment which has a completely different analysis in asset based lending.
To your success!
Patrick Zazueta | Founder
Huntington Coast Capital, Inc.