The Basics About Asset-Based Lending
In the world of financing and loan offerings, the asset base lending business has never been better, yet it also is one of the lesser known types of company funding around. While other types of loans became more difficult to obtain after the recent recession, the asset-based lending institutions thrived because there is simply not as much risk involved in loan repayment failure. So, what is an asset-based loan?
No matter what the reason a company needs extra money to infuse life into a business, a loan taken out using the company’s future accounts receivable, real estate holdings, or numerous other assets owned by that business, is called an asset-based loan. These loans are offered by subsidiaries of large banks, nonbanks, and private investors.
Although there are many other types of asset loans around, financial institutions generally offer two types – credit lines and term loans. Other lenders may offer cash advances, factoring, and Automated Clearing House Network loans, but these types of monies are not seen as loans but rather as a company selling earnings to a lender for instant access to cash.
Each lending institution or financing operation may have their own leverage or collateral criteria for asset-based lending, but most loans with either future earnings or hard assets as collateral. This allows the lender to focus on the collateral’s quality instead of the borrower’s credit rating. Soft collateral can include accounts receivable or other types of future earnings that can be guaranteed to come into the company on a regular basis. Hard collateral includes equipment, land, and inventory, or items that the business currently owns. The percentage of a loan can range from 70 to 80 percent of the full collateral amount and up to 50 percent of the inventory amount.
Small companies can be the hardest hit by the ups and downs of the flow of business, so finding a lender willing to work with small firms is the first step. The next step is to prepare the financials for presentation to the potential lender, including inventory statement, accounts receivable records for at least three months, and any other financial records that can prove the company’s ability to repay the loan. Even if the business is thinly capitalized, if strong repayment options are presented, the loan is likely to be approved.
Working with future incomes against money that is available today to infuse a much-needed boost into the company can come at a cost, but if the company is prepared with all the information needed, the cash can easily be available. That is what asset-based lending is all about.