Using Asset-Based Lending With Inventory

Every business needs help with cash flow from time to time. Perhaps you have unexpected expenses, slow sales, or an opportunity to invest in future success. Whatever the situation may be, an asset-based loan may be the right choice. With this form of lending, you can leverage your inventory to help secure financing for your business.

What Is Asset-Based Lending?

An asset-based loan is backed by your assets. In other words, it is a secured loan. This term is primarily used when describing loans backed by a class of assets such as inventory or accounts receivable rather than specific assets such as capital equipment or real estate. However, it can technically refer to any loan that is backed by one or more assets.

Like other secured loans, asset-based loans use the value of the assets to reduce the risk for the lender. If the borrower defaults on the loan, the assets can be used to help recover the value of the loan.

Using Inventory to Back Loans

Inventory can be used as collateral for a loan. For businesses that have significant inventory, this can be a great option because it is an asset you will have as long as you are operating your business. Of course, having an asset-based loan may prevent you from switching to a leaner inventory model.

Like any other loan, you will need to pay interest and will have regular payments. Inventory can be used to secure a term loan or a line of credit.

Benefits and Drawbacks

Typically, asset-based loans have lower interest rates than credit-based loans. Additionally, they are more readily available because the risk is lower for the lender. However, should you default, your inventory would be the first thing used to repay the lender. Therefore, there is a significant risk if your business gets into financial trouble. It can turn a cash flow road bump into a business-ending problem.

Should You Use This Loan Type?

Whether or not this is the right type of loan for you depends on your specific circumstances. For well-established businesses, asset-based loans backed by inventory can be a reliable and relatively inexpensive way to get some extra funding. It can also be one of the few options available to less-established businesses. Nonetheless, you should carefully consider the risks.