Bidding for government contracts and winning them is business is a perfect revenue model, especially for a small-scale business. But, completing and delivering the government contracts timely is challenging. And the problem is financial because government payments are often delayed. Often, government pays after final delivery of the project.  This results in multiple unpaid invoices, affecting the cash-flow of your company.

This is where government contract lending comes into the picture. There are multiple options for the same. One of them is asset-based lending.

Government contractors often miss this funding option because they are not much aware about it. So, in this post, we will discuss asset-based lending and many other important details about the same.

What is asset-based lending?

Asset-based loans are a form of financing that is also known as secured loans or asset-based financing. These loans allow companies to use their business assets as collateral to secure a line of credit. The types of assets that can be used as collateral include inventory, equipment, real estate, and accounts receivable.

By utilizing asset-based lending, businesses can obtain the necessary cash flow to cover various expenses, including payroll, inventory and equipment purchases, acquisitions, and even expansion. This financing solution provides flexibility to businesses and allows them to address pressing financial needs.

Reasons to choose asset-based lending

Straight forward process to acquire loans and business lines of credit

Asset-based financing programs are simpler to qualify for because the main requirement is to possess assets that can be used as collateral. The collateral used to secure the loan or line of credit offers security to the lender.

Uses valuable assets for collateral

Companies with fixed assets on their balance sheet can take advantage of those assets to obtain additional working capital. Business investments in equipment or inventory can be leveraged to secure additional funding for the business.

Offers greater flexibility than other loan options

Asset-based financing programs have minimal restrictions on the use of funds, as long as they are used for business purposes. Since the funding is tied to the value of the assets, the funding can increase as the value of the assets grows.

Lower costs for similar funding options

Most asset-based lending programs are less expensive than comparable alternatives, such as factoring. Asset-based loans have an annual percentage rate (APR) while factoring lines are priced by discounting the full value of the invoice by a percentage.

Reasons to not choose asset-based lending

All assets are not eligible for collateral

Lenders have specific requirements that an asset must meet before it can be utilized as collateral for a loan or line of credit. For an asset to qualify, it must have high value, a low depreciation rate or high appreciation rate, and be easily convertible to cash.

Costlier than traditional loans

The costs of administering and originating asset-based loans or lines of credit increase the overall cost compared to traditional loans. The expense of initial underwriting and collateral evaluation and monitoring is much higher and more extensive compared to traditional financing.

Chances of losing valuable assets are high

If the business fails to repay the loan, the lender can seize the collateral that was pledged to secure the loan or line of credit. The lender may sell the collateral to recover the money that was provided to the borrower.

What’s the working model of asset-based lending?

The advance amount that a borrower qualifies for in asset-based lending is determined by ABL lenders who assess the value of the borrower's business assets. This value is known as the borrowing base.

The asset-based credit facility is calculated using the total assets of the borrower's balance sheet and their loan-to-value (LTV)ratio. The LTV ratio is used by lenders to estimate their actual return on assets since claiming and reselling assets come with expenses.

Most asset-based lending structures mandate the submission of monthly status reports on the assets used to calculate the borrower's borrowing base. Lenders may also perform periodic field examinations and appraisals to ensure precise valuations of the collateral.

Asset-based lending usually has fewer restrictive covenants, but some lenders impose a fixed-charge coverage ratio (FCCR) on small business owners.

Who is eligible for asset-based lending?

Asset-based loans have few qualification requirements. Most business assets, such as equipment, invoices, and marketable securities, can be used as collateral, depending on the lender. Revenue requirements may vary by lender, but they are typically minimal compared to unsecured loans. Even if you have a weak credit score, you may qualify.

On the other hand, traditional lenders often require a minimum of two years of business operation as a qualification standard. But, asset-based loans can be obtained by newer businesses that have been operational for as little as one year.

Is cash-flow lending and asset-based lending the same?

Cash-flow lending and asset-based lending are two different lending styles. But, people often use them interchangeably and end up with the wrong option.

·      Cash flow lending focuses on future projected cash flows, but asset-based lending primarily focuses on the assets in the business's balance sheet.

·      Cash flow-based loans don't require collateral and rely on the borrower's ability to generate future income. On the other hand, asset-based loans use current assets as collateral and allow the lender to possess a lien on the assets in case of default.

·      Loan terms must be customized to fit the unique needs and criteria of each business. For instance, businesses with most of their working capital tied up in assets may not qualify for cash-based loans, while companies with high profit margins but few hard assets may be best suited for cash flow-based loans.

·      The criteria for granting loans are different for cash flow and asset-based loans. Common criteria used for cashflow loans include EBITDA (earnings before interest, taxes, depreciation, and amortization) and credit multipliers, which help account for potential risks from economic downturns or industry-specific issues.

If you are looking for government contract lending, go for asset-based. The processing will be easy and you will quick approval.

For the best lender, come to Royale Capital.