When might a business prefer asset-based lending?

A business may prefer asset-based lending when it wants to leverage its existing assets, such as inventory, receivables, or other tangible assets, as collateral to secure financing. This type of lending allows companies to access funds more readily based on the value of their assets rather than relying solely on cash flow or credit history. By using receivables as collateral, a business can obtain necessary capital to fund operations, invest in growth, or manage day-to-day expenses without having to liquidate those assets.

Choosing asset-based lending might not be as attractive for maintaining cash reserves, avoiding interest expenses, or minimizing ownership dilution, as these factors pertain to different financing strategies. For instance, maintaining higher cash reserves typically involves not taking on debt at all, while avoiding interest expenses would lean towards non-debt financing options. Moreover, minimizing ownership dilution is primarily a consideration for equity financing rather than asset-based lending. Thus, the practicality of utilizing receivables as collateral makes it a strong choice for businesses in need of flexible financing solutions.