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What you need to know about asset-based lending

You put everything you had into starting your business. You finished your degree then worked two jobs for years to save up enough money to open that café in SoHo. You sunk every dime into it and took out loan after loan to get through those first few years.

The café has been doing well, and now you're considering expanding the kitchen in order to increase menu options. You may even open a second location close to Central Park. You have been turned down for another loan by your bank, but you recently talked to a friend that received an asset-based loan to open his fourth bodega.

Perhaps this is the only option left to give your café the boost it needs to stay competitive and increase its profits. Since these types of loans can be risky with their high interest rates, it is important to receive counsel about financing options before entering into an asset-based loan.

When you choose an asset-based loan, the bank will examine your assets' liquidation value. For example, the accounts on your balance sheet, such as property, plant, and equipment will be evaluated in order to determine if they will serve as acceptable collateral.

Since you cannot get approved for an unsecured loan, these assets will serve as security with an asset-based lender. In addition to looking at your non-cash assets, the bank will also examine your business's cash flow to determine your ability to repay the loan.

Read below for tips on using your business's assets as collateral for a secured loan.

Keep detailed records

Detailed records will prove to the bank that you are a conscientious business owner that is paying attention to the details. However, be sure the records you are keeping are reliable and relevant but not overly complicated.

Know which assets are viable as collateral

Banks are only interested in accepting collateral that has title. For example, a business vehicle or the real estate property is an asset that has title.

Business that maintain an inventory and accounts receivable can also use these two assets as collateral when applying for an asset-based loan.

Know the risks

Be realistic about your business, what it needs to continue to grow, and how the loan will be used. Essentially, you are risking your business by taking out the loan. If the projected income from a second location doesn't look reliable, you may want to reconsider what you are putting at risk.

When considering a source of financing for your business, it is important you understand all your options and the risks you will be taking. For advice on applying for an asset-based loan, contact a New York attorney with experience in business law.

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