Did you know that from 2020 to 2027, the worldwide ecommerce market is projected to expand from its 2019 valuation of USD 9.09 trillion at a CAGR (compound annual growth rate) of 14.7%?
So, who can benefit from it, and how does it work?
This article will answer all the relevant questions you need to know about asset-based financing.
And to help illustrate the differences between asset-based financing and other forms of funding, we'll give some examples of their respective uses, risks, and procedures.
Let’s dive in!
To begin, asset-based financing is a lending option where financiers provide funds against the value of an asset.
In the case of ecommerce, this usually means the seller’s inventory or stock.
But why has asset-based financing become so popular nowadays?
Ecommerce businesses have benefited greatly from this type of financing in recent years because it allows them to gain access to cash and expand their working capital quickly.
Besides that, unlike traditional forms of financing, asset-based financing has fewer necessary requirements and is open to more borrowers.
Compared to other forms of financing, asset-based loans are inexpensive because they are secured debt.
This allows businesses to put their resources toward other expansion opportunities.
Asset-based lending is best for merchants and business owners that can use the orders for their stock to get money from lenders.
In simple words, it's a good option for businesses with valuable assets that might have trouble getting traditional financing, such as startups.
However, it's important to remember that each company that offers asset-based financing will have its own set of rules for qualifying borrowers.
So, an online store's ability to get this kind of financing and how much money it will get depend on several criteria set by the financiers.
Let’s briefly discuss how asset-based financing works.
1. Identify the assets that can be used as collateral — Inventory, accounts receivable, equipment, real estate, and other valuable things can be considered assets.
2. Evaluation of the assets — The lender will then determine how much they can lend the borrower based on the assets' worth. This is usually based on a percentage of the value of the assets, like 70–80% of the value of accounts receivable.
3. A loan agreement — This agreement will spell out the loan's terms, such as the interest rate, the schedule for paying it back, and any other conditions.
4. Collateral Management — The borrower will then take care of the assets, making sure to keep as much of their value as possible. For example, if the collateral is inventory, the borrower will have to keep track of the amount of inventory and make sure it is stored and cared for properly.
5. Repayment — According to the loan agreement, the borrower will have to make regular payments to the lender. If the borrower can't pay back the loan, the lender could take the collateral and sell it to get their money back.
6. Release of Collateral — Once the loan is paid off in full, the lender will give the borrower back the collateral.
Myos is an asset-based finance company that helps sellers worldwide speed up their growth.
They offer working capital loans between £10,000 and £2,500,000 with a monthly fee of 1% to 3% of the loan amount.
First, fill in the application form and list the assets you want to use as collateral.
Then, Myos will use AI and Machine Learning to look at the product data and determine how much money to lend you.
By taking the product as collateral, you are free of personal risk and guarantees.
This means that, within 24 months, you can repay the loan however you want.
If you fail to repay the loan in time, Myos will take your assets as compensation.
Depending on the lender, this process may differ slightly.
However, this gives you a good idea of what to expect when working with an asset-based financier.
So, let's dive in and see how asset-based financing stacks up against the competition.
Here, we will evaluate this method alongside several others, including crowdfunded online stores, revenue-based financing, and conventional bank loans.
When it comes to capital, businesses have access to a variety of funding options, including asset-based financing and traditional bank loans.
Differentiating features are as follows:
💰 Asset-based financing — Includes inventory, equipment, and accounts receivable. Businesses that can borrow against tangible assets can use this financing.
💰 Traditional bank loans — Type of loans given by a bank to a business based on its creditworthiness and ability to repay.
✅ Asset-based financing — Inventory and accounts receivable financing are two common uses of asset-based financing. It is a form of financing used for capital expenditures such as the acquisition of new machinery or the construction of larger storage facilities.
✅ Traditional bank loans — Can be put toward a number of distinct goals, including paying off debt, growing the company, and meeting day-to-day operating expenses.
⛔ Asset-based financing is riskier than bank loans — Since it is secured by collateral, lenders have collateral if borrowers default. If the collateral's value drops, it may not be enough to cover the loan.
⛔ Traditional banks require a ton of paperwork — The bank loans are less risky than asset-based loans because they are collateral-free. However, banks heavily consider the company's credit history when approving the loan, which makes it very hard to get.
✒️ Asset-based financing — The application process is usually quicker than for a loan from a traditional bank. This is because the value of the collateral being offered is the primary consideration for lenders.
✒️ Traditional bank loans — Usually require a more extensive application process wherein the borrower details their financial situation, credit history, and capacity to repay the loan.
A business can secure financing in exchange for a share of its projected future earnings through a revenue-based financing arrangement.
Businesses that have a reliable revenue stream but lack the assets necessary to secure traditional loans often turn to this alternative form of financing.
Here are the key differences between asset-based financing and revenue-based financing:
✅ Asset-based financing — Typically used to meet short-term working capital requirements.
✅ Revenue-based financing — Used most frequently to fund expansion efforts or fill the gap between funding rounds. Startups that have a proven revenue model but have not yet reached profitability frequently use this method.
⛔ Asset-based financing — Because it is secured by physical assets rather than revenue, is typically considered as a safer alternative to revenue-based financing. However, as was previously discussed, collateral may not be adequate to repay the loan if its value declines.
⛔ Revenue-based financing — Due to the lack of collateral backing the investment, returns may be lower than anticipated in the event of a revenue shortfall at the company.
✒️ Asset-based financing — Typically includes periodic payments of interest and a predetermined schedule for paying back the principal. Repayment of the loan is scheduled for periodic intervals determined at the outset.
✒️ Revenue-based financing — Involves compensation based on the level of sales made by the company. Until a certain threshold is reached, usually a multiple of the initial investment, the investor receives a percentage of the company's net profit.
Ecommerce crowdfunding is a type of funding in which a company acquires capital from a large number of individuals
Typically, ecommerce companies use this type of financing when they want to introduce a new product or grow their operation.
Here are the key differences between asset-based financing and ecommerce crowdfunding:
✅ Asset-based financing — The goal is to help companies meet their immediate working capital requirements or pay for large-scale investments..
✅ Ecommerce crowdfunding — Its goal is to facilitate the accumulation of capital from a sizable number of individuals, which will then be used by online merchants to finance new products, the development of existing ones, or the execution of advertising campaigns.
⛔ Asset-based financing — Compared to ecommerce crowdfunding, it has a lower perceived risk. This is due to the fact that lenders have something concrete to fall back on in the event of a loan default. However, the risks of failure or repayment are higher than with ecommerce crowdfunding, which is typically used for smaller loans.
⛔ Ecommerce crowdfunding — If the company fails to fulfill its obligations, the investors stand to lose their entire investment since it is not protected by collateral.
✒️ Asset-based financing — Needs the borrower to give details about their assets and financial situation. Before giving the loan, the lender may also want an evaluation of the collateral and other checks.
✒️ Ecommerce crowdfunding — Usually has a much less complicated process. Businesses merely start a campaign on a platform for crowdsourcing, set a funding target, and provide incentives or equity in exchange for funding.
Each type of financing serves a unique function and entails a unique set of risks and procedures.
Before making a final decision, businesses should give careful consideration to their financing requirements and available options.
As can be seen, asset-based financing paves the way for online merchants to put their inventory to use while also gaining access to much-needed working capital.
Applying with Myos takes minutes, and once approved, ecommerce businesses have complete discretion over how the secured funds are used.
Also, unlike many other online lenders, Myos does not demand a personal guarantee from its customers.
Its minimal documentation and prior business history requirements make it easier for more online shops to get approved.
Therefore, asset-based financing with Myos is a quick and low-risk way for your ecommerce store to gain access to funds for any purpose.
👍Goods alone may be pledged as collateral.
👍Negotiable repayment terms.
👍AI will review your goods.
👍There are several funding options, including purchase, stock, and cross-funding.
👍Get a loan of £10,000 - £2,500,000.
👍It only takes 3 easy steps to apply.
👍Immediate action (24-72h).
Get your non-binding free offer from Myos to secure funding and start growing your ecommerce business today.