Small businesses can benefit from asset-based loans because they’re quick and easy. Asset-based loans use a valuable asset such as a car as collateral on a short-term loan. This eliminates the need to prove income or have a good credit rating when applying for finance.
The asset is securely stored by the lender until the loan is repaid. Once the loan and the interest are fully repaid, the asset is returned to the borrower. Businesses can also get asset-based loans using business-owned assets such as company vehicles or commercial property.
When to get a business loan (and when not to)
A business loan is a good way to cover unexpected costs but it should only be used in certain circumstances. It’s not good business practice to take out a loan to cover normal business expenses or pay existing debt.
Examples of when a business loan might be used include:
- to cover the costs of a revenue-generating opportunity
- for working capital that will be used to expand your product or service line
- to cover seasonal inventory or staffing needs
- to cope with a natural disaster or equipment failure
- as an advance on an anticipated payout or guaranteed income stream.
8 ways an asset-based loan can help small businesses
Short-term asset-based loans are relatively low risk because, even in the worst-case scenario, they don’t leave businesses with long-term debt that they struggle to settle.
A cash injection at the right time can help a small business grow and can have excellent long-term returns. Here are eight ways that an asset-based loan can be used to help a small business.
1. Expanding product or service offering
As demand increases or changes, you might need to expand your product or service offering. A loan can cover the costs of this expansion. The increase in revenue from meeting higher demand should more than cover the loan amount in a relatively short time.
2. Equipment cost
If new equipment is needed to meet production quotas or a vital piece of machinery breaks and needs to be replaced, an asset-based loan can cover the cost. Business would grind to a halt without it, so the small risk of an asset-based business loan is worth it.
3. Inventory/stock
If your business needs inventory to function, getting well stocked makes sense. This is a cost that may only be recouped over time but the initial outlay allows sales and/or production to go ahead so the business can generate revenue.
4. Seasonal expenses
There are usually expenses associated with busy periods such as the festive season. These expenses include additional staff, longer operating hours, seasonal decorations, higher demand and seasonal products or services.
5. Temporary staffing
It may be critical to employ additional staff occasionally. This may be seasonal or for stock takes, archiving or audits. Although short-term, these additional expenses can make money tight. A business loan can cover these essential costs.
6. Business opportunities
If an opportunity to invest for the future of the business comes up unexpectedly, it makes sense to use a business loan to pursue it. This could be a merger or opportunity to buy assets at excellent prices.
7. Bridging finance
If you’re expecting revenue from a new contract or sale but you need to spend money upfront to secure it, an asset-based loan can act as bridging finance to cover the costs. The loan can be quickly repaid once the anticipated revenue is received.
8. Temporary cash-flow issues
There are many reasons why a small business might have temporary cash flow issues but it shouldn’t close your business. A short-term business loan can give you enough cash to stay afloat.
Asset-based business loans from Lamna
At Lamna, we offer asset-based loans for small businesses based on a range of business assets including commercial property. Also, we offer fast, discreet loans against the value of a wide range of assets, from luxury watches and jewellery to vehicles or artwork.
For more information about using an asset to secure a short-term loan, contact us on 086 111 2866 or simply complete and submit our online application form.
ILLUSTRATIVE EXAMPLE
Client borrows R10,000 for 90 days.
Loan Amount | Repayment Period | Monthly Interest | Total Cost of Loan | Initiation Fee | Monthly Fee | APR |
|---|---|---|---|---|---|---|
R10 000 | 3 months | R500.00 | R2 914.50 | R1 207.50 | R569.00 | 60% |
Fixed rates range from 36% to 60% APR and payment options range from minimum 3 to maximum 24 months. Apart from the initiation and monthly fees shown below, the only additional fee is credit life insurance if the borrower does not have this already.