Asset-Based

Lending

Asset-Based Lending

Asset financing refers to the use of a company's balance sheet assets, including short-term investments, inventory and accounts receivable, to borrow money or get a loan. The company borrowing the funds must provide us with a security interest in the assets to be purchases or acquired.

This llows companies to borrow money based on the liquidation value of assets on their balance sheet. A recipient receives this form of financing by offering inventory, accounts receivable, and/or other balance sheet assets as collateral. While cash flows (particularly those tied to any physical assets) are considered when providing this loan, they are secondary as a determining factor.

Business entities have many more options than individuals when it comes to borrowing which can make business borrowing somewhat more complex than the standard personal borrowing choices. Lenders can offer a wide range of lending provisions within these two broad categories to accommodate each individual borrower. Unsecured loans are not backed by collateral while secured loans are.

Within the secured loan category, businesses may identify cash flow or asset-based loans as a potential option.


Assets

Common assets that are provided as collateral for an asset-based loan include physical assets like real estate, land, properties, company inventory, equipment, machinery, vehicles, or physical commodities. Receivables can also be included as a type of asset-based lending.

If a borrower fails to repay the loan or defaults, we have a lien on the collateral and we can sell the assets in order to recoup defaulted loan values.



Loan-to-Value (LTV)

Like all secured loans, loan to value is a consideration in asset-based lending. A company’s credit quality and credit rating will help to influence the loan to value ratio they can receive.

Typically, high credit quality companies can borrow anywhere from 75% to 90% of the face value of their collateral assets. Firms with weaker credit quality might only be able to obtain 50% to 75% of this face value.



Collateral

The collateral or physical assets being used to obtain a loan cannot offer these assets as a form of collateral to other lenders.



Due Diligence

Before granting an asset-based loan, we will require a relatively lengthy due diligence process. This process can include the inspection of accounting, tax, and legal issues along with the analysis of financial statements and asset appraisals.

The underwriting of the loan will influence its approval as well as the interest rates charged and allowable principal offered.



Asset-based Lending Examples

1. Equipment Financing is one example of asset-based ending where we buy and deliver the equipment to you. The procured will act as the collateral and you continue to make pre-agreed weekly or monthly payments until it's fully paid off. Until the equipment is fully paid off, the equipment remains our own.

2. Receivables lending is another example of an asset-based loan that many companies may utilize. In receivables lending, a company borrows funds against their accounts receivables to fill a gap between revenue booking and receipt of funds. Receivables-based lending is generally a type of asset-based loan since the receivables are usually pledged as collateral.



Related Pages

Cash Flow Lending

Viable vs Dumb Business

No Collateral vs Collateral

Equity vs Debt Capital