Asset Based Loans
Asset based loans are any kind of loan secured by an asset. If the loan is not repaid, the asset is seized by the lender. A mortgage is an example of an asset based loan. However, the term is used more commonly to describe business lending.
Terms for asset based loans are usually for a short period of time and interest rates may be higher than conventional financing. However, these loans are often needed by companies that would not have their required funding needs met by a conventional loan process.
Real estate, accounts receivable, inventory, machinery and equipment are the typical assets that secure the loan. However, assets such as things like the value of pharmacy script files, a trademark, or whole assets of intellectual property may also be considered in an asset based transaction. The loan may be secured by a single asset or a combination of assets.
Asset based lending, sometimes referred to as “equity based” lending, is easier to obtain for borrowers who do not conform to typical lending standards, because the lender is secured by the equity of the asset and not the company’s past credit history. This type of lending can be pursued when normal avenues of raising funds hasn’t worked, or the company is in a financial position unattractive to conventional lenders.
Asset based loans can provide the funds allowing a business the ability to capture a quickly developing market opportunity, absorb the costs of an acquisition, assist in leveraged buyouts, or provide a line of credit to bridge financially difficulties the company is experiencing.
An asset based business line of credit can allow the company to bridge itself between the timing of cash in-flows and cash out-flows. Cash flow issues usually revolve around accounts receivables. This requires the lender to monitor and audit the company’s accounts receivables, but this also allows the borrower the ability to obtain larger lines of credit.
As a business finance option, business owners, or a Consultant pursuing funding for a client, should consider asset based loans as a possible solution when conventional financing may not be obtainable.
Tips for Asset Based Loans
1. There is a lower cost of capital for asset based loans than factoring a company’s receivables.
2. Conventional loans require debt to equity ratios of 4 to 1 or less. Asset based lenders
may allow ratios of 10 to 1, or possibly higher.
3. Asset based lenders may require day-to-day monitoring of the receivables where factors
may require total control of the account receivables.
To Your Capital Success,
Specialist in Targeted Acquisitions, Business Funding, and Growth Strategies.