Occasionally, a business may get into a position where funds are needed quickly, but the business doesn’t qualify for a traditional loan. If you find yourself in a similar pinch, an asset-based lending option may be right for you.

Simply put, asset-based lending is exactly what it sounds like. You put assets like inventory, equipment or accounts receivable down as collateral and if approved, a lender will loan you the funds. It’s straightforward enough, but before you secure this type of funding, there are three things you should know.

Having Valuable Inventory Beats Good Credit

Since approval is based on the value of your assets, bad credit won’t necessarily keep you from getting approved. Poor credit can make it difficult to acquire traditional funding, so if you’re still working on boosting your credit score, an asset-based loan could be a great option. You will need to demonstrate the value of your assets, but this is a lot easier than raising your credit score in a short period of time!

Knowing Your Inventory is Important

Before obtaining funding, you must know if there are any liens against your inventory. If you’ve been the sole business owner since day one and purchased all of the inventory yourself, you are likely well aware of what is being financed and what you own outright. On the other hand, if you’ve inherited, purchased or acquired this business, doing some research is absolutely vital. Not owning the inventory doesn’t mean you won’t get the loan, but it will create a few extra steps in the application process, so be sure you have all of this information ready upfront.

Paying It Back On Time is Crucial

This seems obvious, but one needs to truly consider the consequences of defaulting on this type of loan. For instance, if you own a bakery and you have a brand new, state-of-the-art oven, that oven would serve as ample collateral for your loan. If for some reason you default on the loan and your lender repossesses your oven, you haven’t just lost a piece of machinery. You’ve lost an absolutely vital part of your operation. This is not meant as a deterrent, in fact, many businesses use asset-based lending and have tremendous success. The key is to borrow the correct amount and be sure you have a solid plan to pay it back.

Asset-based lending is a wonderful alternative option. If you own valuable inventory and have a plan to pay back any borrowed funds, this may be the perfect solution for you.