Most small businesses that have survived the great recession are left with serious battle scars. For many, business-credit ratings have suffered. As cash flow declined, bad debts increased and sales decreased.
Many companies fell behind on their obligations to creditors and were forced to restructure their debts. Others violated the covenants of their debt agreements, which can also require restructuring. Smaller businesses that rely on the credit rating of their owners also suffered as business owners saw their FICO scores damaged by maxed-out credit cards, foreclosures and mortgage modifications.
As certain areas of the economy are beginning to show signs of recovery, many businesses lack the money to take advantage of this change. Traditional lending options are unavailable because of their damaged credit ratings. Combine this with tighter lending standards and you have the makings of a perfect storm of business frustration.
Getting business loans with bad credit is difficult. Are there any options available? Yes: asset-backed loans.
What are asset-backed loans?
Asset-backed loans or ABLs are issued to companies based on the quality, value and condition of an asset or group of assets that serve as security or collateral for the loan. Typical assets that can be used to secure an ABL include accounts receivable, inventory, equipment and real estate.
Liquid assets–those that can easily be converted to cash in the short-term–are considered the most attractive candidates to qualify for ABLs. Long-term assets that cannot be converted to cash easily are considered less attractive. Whether an asset is considered eligible for an ABL is determined by the lending institution and the criteria can vary greatly.
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Financial institutions that issue ABLs generally do not look at the credit quality of the company requesting the ABL. The amount lent to a borrower is based on the value of the collateral. That’s why it’s an attractive opportunity for companies that need working capital and have assets but lack the credit or cash flow to qualify for a traditional loan.
So how much will I get for my assets?
When a financial institution issues an ABL, their goal is to eliminate the chance of losing money. They won’t allow for any margin of error when determining how much to lend to your company. The actual amount is based on two values: the borrowing base and the advance rate.
The borrowing base represents the value that the loan issuer assigns to the asset. The advance rate represents the percentage of the borrowing base that the lender will loan. The more liquid the asset, the higher the advance rate that you can obtain. For accounts receivables, it’s common to receive an 80-percent to 90-percent advance rate. For less liquid assets like inventory, advance rates typically reach no higher than an 80-percent advance rate.
Go to the article: Getting A Business Loan With Bad Credit
