Asset-based loans are used to describe lending to business and large corporations using assets not normally used in other traditional loans.
This type of funding is only possible in countries with legal systems allow borrowers to pledge such assets to lenders as collateral.
Apart from large corporate clients, small business owners also access asset based lending services for raising short term finance.
Asset-based lenders allow companies to borrow money based on the liquidation value of assets on its balance sheet.
A borrower is granted financing by offering inventory, accounts receivable, and other balance sheet assets as collateral.
Cash flows tied to any physical asset may be considered as collateral. Asset-based lending often references the loan-to-value ratio.
For instance, a lender may state the loan-to-value ratio for an asset-based loan is 70% of marketable securities.
This simply implies that the lender would only be willing to provide a loan of up to 70% of the value of the marketable securities.
The loan-to-value ratio will depend on the type of asset used for collateral. The more liquid an asset is, the higher loan to value ratio lenders would be willing to offer.
This type of business line of credit is designed to allow the company to offset shortfalls in cash flow for operations.
An asset-based loan has a revolving credit limit that fluctuates based on the actual accounts receivables balances that the company has.
The lender monitors and audits the company to evaluate the accounts receivables size.
This allows for large credit line limits, and enables companies to borrow more funds for operations. Loan terms stipulates collateral assets seizure in the event of default.
This allows the lender to profitably collect the money owed to the company in case of default on its obligations to the lender.
Short term loans against luxury assets including vintage cars, luxury watches, wine collections and other assets of value, are a type of asset based loans.
Most asset based lenders do not conduct credit checks and disburse the loan amount within 24 hours.
This form of commercial lending is designed to finance the working capital needs of a borrower whose cash flow may not support debt repayment.
Cash flow is the primary repayment source for an asset-based loan. The lender has lien on the company’s assets and gains control over the receipts of the collateral’s liquidation.
Asset based lending has become a popular choice for companies and individuals with no credit ratings, track record or time to look for traditional capital sources.
An asset-based loan secured by accounts receivable is much safer than an asset-based loan secured by a property.
A property is illiquid, and the lender may find it hard to liquidate the asset on the market quickly.
What is asset based underwriting?
Monitoring and controlling collateral are critical to the asset-based lender. Collateral evaluation starts with a comprehensive field examination to determine value of the asset. This is then followed by a continuing program of periodic examinations.
The collateral and loan values are monitored continuously to ensure that the realizable value of the collateral is always enough to repay outstanding loans.
Common assets that may be used 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. Prior to approving an asset-based loan, lenders may require a lengthy due diligence process.
The process can include the inspection of accounting, tax, legal issues, analysis of financial statements, and asset appraisals.
The underwriting of the loan will influence its authorization as well as the principal loan amount, and interest rates charged.
If a borrower fails to repay the loan, the lender has a lien on the collateral and can levy and sell the assets to recoup defaulted loan value.
Most companies borrows asset based loans against their accounts receivables to fill a gap between revenue booking and receipt of funds.
Underwriting for any type of loan will heavily depend on the borrower’s credit score and credit quality.
While a borrower’s credit score is a factor in loan approval, each lender has its own set of underwriting criteria for determining the credit worthiness of borrowers.
Getting unsecured loans can be hard and comes with higher interest rates due to increased risks of default.
Secured loans backed by collateral can reduce the risks of default for the loan underwriter. This may lead to better loan terms for the borrower.
How asset based loans work
Most businesses need loans to meet routine cash flow demands. For instance, a business may get a loan to make sure it can cover its payroll expenses.
If the company looking for a loan does not have enough cash flow or cash assets to cover a loan, the lender may offer to approve the loan and use the company’s physical assets as collateral.
The terms and conditions of an asset-based loan will depend on the type and value of the assets used as collateral.
Most lenders prefer highly liquid collateral that can readily be converted to cash if the borrower defaults on the payments.
Loans using physical assets as security are considered riskier, so the maximum loan will considerably be less than the book value of the assets.
Interest rates charged will also depend on the applicant's credit history, cash flow, and time in the business.
Asset based loans have low interest rates since the lender can recoup funds in the event the borrower defaults.
Asset-based lending is best suited for companies with large balance sheets, and lower EBITDA margins.
This type of loan is also preferred by businesses that require capital to operate and grow.
An asset-based loan can provide a business with needed capital to address its lack of rapid growth.
A company’s credit quality and credit rating can help to influence the loan to value ratio they receive.
High credit rating businesses can borrow anywhere from 75% to 90% of the face value of their collateral assets.
Businesses with weak credit ratings may only get 50% to 75% of this face value.
Asset-based loans are often very strict with regards to the status of the collateral.
The company cannot offer the same assets as collateral to other lenders. Second loans using the same collateral can be illegal.
Large companies occasionally seek asset-based loans to cover short-term needs.
Costs and time needed to issue additional shares or bonds in the capital markets may be too high.
Cash demands may be time-sensitive, such as in the case of a major acquisition or an unexpected equipment purchase.
Types of asset based financing
Here’s a breakdown of the most common types of asset-based loans. This will help you pick the right one for your particular business.
- Invoice Financing
An asset-based lender will loan you an amount based on your existing invoices. Invoice financing is similar to invoice factoring, but not the same.
- Inventory Financing
Even though this type of loan doesn’t cover the entire worth of your physical inventory, you will still receive most of your inventory’s value.
- Equipment Financing
Equipment financing makes it possible for a business to get needed equipment without a large up-front expense.
- Business Lines of Credit
Lines of credit are a common type of business loans and are essential. Don’t let unpredictability derail your business goals.
How to Apply for an Asset Based Loan
If you have an already operational business, make sure to bring invoices, tax returns, and bank statements to let the potential investor know you are a solid investment. When applying for inventory-based loans, a strong inventory management system is incredibly useful.
This will let your lenders keep a close check on your current inventory levels to protect their investment. Most asset-based lenders also need to make sure that your existing assets aren’t being used as collateral for another loan.
The lenders also need to make sure that your taxes are in good standing and that your inventory will not be seized. The key is finding lenders that are willing to offer lines of credit to your business.
Asset-based lenders and investors prefer to make large loans. The cost of monitoring an asset-based loan is generally the same whether it's a large or small loan.
Getting approved for an asset-based loan should be easy if your company has good financial statements, good reporting systems, commonly sold inventory, and customers who have a track record of paying their bills.
Asset-based lenders will give loans based on an agreed percentage of the secured assets' value. The LTV percentage is generally 70% to 80% of eligible receivables and 50% of finished inventory.
The loans are best for manufacturers, distributors and service companies with a leveraged balance sheet. Asset-based loans can also be used to finance business acquisitions.
Asset-based loans cost more than traditional loans and interest rates vary greatly. Most asset-based lenders will require that your customers send payments directly to the lender. A third party gains control of your company's cash flow.
To secure an asset-based loan, make sure to have a detailed and accurate financial information. Make the lender comfortable with a credible case for long-term viability.
Have a professionally-prepared financial statements that prove you have a credible business.
Asset-based loans are less risky as it is collateralized with an asset. If the borrower defaults on the loan, the lender can liquidate the assets to settle the amount outstanding.
We can fund diverse projects such as;
Hospitality (hotels and resorts)
green energy projects
Logistics and transportation related developments
Residential and housing developments
ground up construction
commercial real estate
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