BlogFinance
asset-based-lending-vs-bank-financing
November 25, 2022
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8
min read
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Written by: 
Nikolaus Hilgenfeldt
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Category:
Finance

Asset-Based Lending vs Bank Financing: Which Is Better For You?

Are you trying to grow your ecommerce business and want more funding? 

Sure, we all want to have many big ideas that could grow into successful companies and even established household brands. 

It can take time to think of ways to fund your business while keeping an eye on the bottom line.

Two funding sources that ecommerce entrepreneurs compare and consider usually come to doubt between asset-based lending vs bank financing solutions. 

These two funding options may seem interchangeable, but they are very different methods for getting money into your business.

In today’s article, we’ll go through these two solutions, explain how they work, and explain their cons and pros to help you find the best solution for your business.

So let’s begin!

What Is Asset-based Lending?

Asset-based lending(ABL) or Asset-based financing is a type of financing that allows borrowers to use their assets as collateral for a loan. 

Using assets as collateral for the loan means if the borrower does not pay back the loan, the lender has legal ownership of those assets until they are paid off. 

What’s good about working with an asset-based lender is that they can provide you with various options for financing your business needs. 

They typically offer lower interest rates than traditional lenders and more flexible terms.

The Benefits of Asset-based Lending

There are different benefits of asset-based lending, such as:

1. Quick Approval Process 

With traditional bank loans, you typically need to fill out a lot of paperwork and wait several weeks before getting approved.

That's not the case with asset-based lenders, who can issue a decision in as little as one day, depending on the lender.

2. Debt Consolidation Options Available 

If you have multiple lines of credit or other debts that are weighing down your business, an asset-based lender may be able to help you consolidate those into one loan with a lower interest rate and monthly payment amount (which will make it easier for you to pay off). 

This can also help reduce your risk if something goes wrong with one or more of your accounts because they're all tied together under one larger loan agreement now instead of two or three separate ones.

3. Higher Credit Limits Than Traditional Banks Offer

Banks tend to limit their loans based on factors like annual revenues.

4. Lower Interest Rates

Asset-based loans usually carry lower interest rates than bank loans because they're secured by collateral instead of personal guarantees.

You may be able to get more flexible terms on an asset-based loan, such as longer repayment periods or lower monthly payments.

5. Increased Liquidity 

If you need cash quickly, you can sell your assets and use the proceeds as needed without waiting for a bank to approve your request for a loan.

In many cases, asset-based lenders will give you more options than banks do. 

For example, if you need money in a hurry but don't qualify for a bank loan, an asset-based lender can get your project off the ground without asking too many questions.

Disadvantages of Asset-based Lending

1. Lack of Transparency 

Some asset-based lenders don't offer as much transparency as banks do when it comes to fees and terms, which aren’t that precisely and transparently defined for each case.

This may cause another potential drawback for the borrower, where in most loan agreements, the lender can easily seize the assets if the borrowing base falls below the amount required to support the loan.

What Is Bank Financing?

Bank financing, also known as debt financing, is when a company borrows money from a bank in order to finance its operations. 

The company must repay this money to the bank with interest over time. 

This type of financing can be used for any purpose, but it's most commonly used to pay for capital expenses such as equipment, inventory, production, etc.

To determine whether a business is eligible for a loan, banks will frequently examine the store's length of business history and individual and corporate credit and request collateral.

When obtaining a business loan, banks typically need a personal guarantee from the company owner, which is not the case with asset-based lending.

Banks are traditionally risk-averse entities and don't like lending money to companies with a lack of credit or little company history, which many startups have.

The Benefits of Bank Financing

1. Lower Interest Rates

What’s good is that some banks will offer you lower interest rates than other options, but the catch is they will only accept your business if there’s no big risk about it.

2. Flexible Use of Funding

A great benefit of bank financing is that there are fewer restrictions on using your money. 

If you're looking for startup capital or working capital, banks typically require that the funds be used toward general operating expenses or working capital.

Disadvantages of Bank Financing

1. It Takes Time To Get the Funding

The main drawback of bank financing is that it can take longer than asset-based lending because banks tend to scrutinize applications more carefully than asset-based lenders. 

On the other hand, there's also no guarantee they'll approve your request.

2. Bank Financing Is Not a Solution for Every Business

To qualify, you must have a strong credit score and the capital necessary to make payments on time. 

On the other hand, the bank will require a business plan and cash flow projections, annual revenue, business history, industry, and size to predict whether you’re secure for financing.

Many of those who have tried bank financing have either failed or been frustrated by the process.

3. Usually Gives You Small Loans

Typically banks won't provide you access to large sums of cash, especially if they’re not 100% sure about the sustainability of your business.

What Is the Difference Between Banking and Lending?

When you apply for bank financing, there are no assets required from the borrower. 

This makes it easier to qualify for a loan from that aspect, but it also means that your credit score is more important than your assets when applying for a loan.

On the other hand, when you apply for asset-based lending, you're borrowing against the value of items that you own. 

The first difference is that a bank will lend you money based on your income, but an asset-based lender will only lend you money based on the value of your assets. 

Besides that, the difference is that banks are more likely to require an application fee than lending companies. 

Also, banks are more likely to check your credit score before they approve or deny your loan request than lending companies.

Which One To Choose?

The best financing option for you will depend on what type of business you are starting, your credit score and financial history, and your business experience.

If you have time to wait for the financing and want to be more flexible with your funding, consider bank financing.

But keep in mind that the chances of being accepted are lower, it will take time to get the funding, and it will probably result in smaller loans.

So if you don’t want to spend time, or are in a hurry to scale your business, inventory, or operations, then asset-based lending is a solution for you.

As you can see, asset-based finance enables online shops to leverage their inventory and free up operating capital to grow their operations.

That’s why we created Myos.

Myos is an asset-based finance provider that helps you accelerate growth. 

We hand out working capital loans over 10k£ - 2m£ with a monthly fee of 1-3% of the outstanding loan volume. 

Based on AI and Machine Learning, our algorithm allows us to evaluate the product data and determine the financing volume without requiring additional credit checks from you. 

On the other hand, we’re taking the product as collateral, eliminating personal risk and guarantees.

Ecommerce companies who partner with Myos can quickly apply in just minutes and have complete freedom to spend the secured cash for any purpose. 

The financing process goes into three steps:

1. Apply - Send request for financing based on one or more top-selling products.

2. Get a payout - Negotiate with the supplier or simply use his inventory while Myos will pay the financing amount to you or the supplier.

3. Sell - A part of the goods directly goes into the sale. With first revenues, you’re flexible to pay back the first installment & receive new goods.

Here’s an example:

example-of-a-financing-process-myos

So, whatever your ecommerce store's cash needs, asset-based finance with Myos offers a rapid and low-risk solution to get capital. 

Discover the advantages of asset-based finance with Myos and obtain your cash immediately!

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