The Asset-Based Loan:
No Longer Just Last Recourse
asset-based loan is another excellent option for a company
looking for cash to grow or to cope with cash-flow
These days, many business owners and financial managers know a lot
about rejection. Their education comes at the hands of bankers who are
all too frequently denying applications for new credit or curtailing
existing business credit lines, if not closing them altogether. From
to well-established companies, the story is often the same.
If your company is trying to get through a seasonal downturn or you
the enviable problem of funding a growth spurt, an asset-based loan may
be your solution. And, as is quite common for this type of business
financing, your loan could be structured as a new business line of
credit, giving your firm not only the cash it needs now, but also
maximum financial flexibility for future needs.
In the past, the asset-based loan was characterized as a
financing strategy of last resort – a lifeline appropriate
troubled companies. Today, though, that’s no longer the case. Many
customers for these loans are successful companies that are growing so
rapidly that traditional commercial bankers can’t or won’t keep up.
Even if your company is not currently in need of a cash infusion, you
can unlock the value of its assets for the future – expansion,
acquisition capital, recapitalization, or any other purpose requiring
business capital – with a business line of credit that can be used at
How Does Asset-Based Lending Work?
In an asset-based loan situation, a lender evaluates one or more of the
your assets, which might include its accounts receivable, machinery and
equipment, real estate, inventory, or even contracts. If satisfied with
their value, it will make a loan against these assets – often in the
form of a new business line of credit – holding them as collateral
until the loan is paid off or the credit line is closed.
the difference between an asset-based loan and
Receivables factoring is the
actual sale of invoices to a
for cash; asset-based lending is a loan that can be secured by many
different types of business assets, including receivables.
it different from a traditional bank loan?
The differences are many and they are significant. A bank loan
on an in-depth evaluation of a company’s financial position, its credit
worthiness, and its projected performance. In addition, banks are
constrained by a plethora of regulations, which have the effect of
severely limiting their flexibility. Because asset based lenders are
not banks and not bound by banking rules, they can freely target their
funding to companies outside the sphere of traditional lending, with a
focus on assets, management expertise and growth potential, rather than
current and historical financial performance.
The size of a business line of credit or loan is based on a percentage
of each asset’s appraised value, and the percentages vary according to
the type of asset. For example, the percentage lent on machinery and
equipment – the so-called “advance rate” – might be as much as
80% of its appraised value, while the advance rate on
accounts receivable from creditworthy customers could be as much as 85%
of the receivable amount.
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The collateral will be monitored and evaluated throughout the life of
the loan, and as asset values change, loan adjustments might be
necessary. If an asset-based loan is secured by equipment, for example,
the lender will want to periodically ensure that business still owns
it, it is serviceable, and it is where it is supposed to be.
The prospect of having someone constantly monitoring your business
assets might seem invasive at first, but it is necessary to make asset
based lending work. Their secured position generally gives asset-based
lenders much more flexibility than traditional commercial lenders, but
the fluid nature of certain types of assets (inventory, for example)
means their security will be in constant flux. So from the lender’s
standpoint, it makes sense that it would want to be aware of changes in
the collateral securing its funds.
The other significant price for this flexibility is that the finance
charges tend to be higher than traditional bank loans – though actual
rates can vary widely, depending upon the nature of the collateral
securing the loan, and other factors, such as the borrower’s
How to Find an Asset-Based Loan
There are several hundred non-bank lenders of all shapes and sizes
actively making asset-based loans in the U.S., Canada and Mexico. From
smaller finance companies that specialize in certain asset classes,
specific industries or limit their lending to customers in a particular
region, to major lenders with a comprehensive menu of product lines and
wide geographic coverage, there is most likely one that can
offer financing suitable to
For companies that are interested in exploring their asset-based loan
options, the best place to start is by discussing your needs with a
trustworthy commercial finance professional who can help you locate
potential lenders matched to your needs, including the type and size of
your company, its location, and the financing you are seeking.
Many kinds of companies benefit from asset-based finance,
but there are some industries that find this technique particularly
valuable. Here’s a sampling:
- Automobile parts and supplies manufacturers
- Department stores
- Food processors/manufacturers
- Groceries and related products
- Lumber and other building products
- Metal goods manufacturers
- Motor-vehicle supplies and parts
- Radios, TVs, consumer electronics
As is the case with any loan, price is an important consideration, so
it makes sense to comparison-shop. If you align yourself with a
competent and ethical professional who deals with a number of different
lenders, he will be able do that for you.
A company that make use
of an asset-based loan
has working capital
financing that can be used to fuel growth and weather cyclical
fluctuations in cash flow. There is now widespread acceptance of this
kind of business financing by companies of all sizes, and with
asset-based finance visible on the radars of business owners
professionals across the entire spectrum of industry, more lenders are
entering the field to meet the surging demand.
Since their appetites and capabilities differ, your goal should be to
build a solid relationship with a lender that truly understands your
company’s current needs and its long-term objectives. The result will
be a partnership giving you the resources and the financial flexibility
to move your business forward.