Asset Based Loans

An asset-based loan is a loan, secured by a company's assets.  Accounts Receivables (A/R), equipment, and inventory are the common assets used to back the loan. The loan may be collateralized by a single group of assets or some combination of assets, such as, a combination of A/R and inventory.

Asset based lending is used with all size companies and can allow an asset heavy corporation to obtain financing when they are experiencing a need for growth or have not met standard bank liquidity or credit underwriting requirements. These loans are typically priced at a higher interest rate due to the asset collateral management and the reduce credit quality of the companies that utilize asset based lending.  It’s common for banks and private business finance firms to offer asset based lending as a mid cost of capital loan facility.  This means the cost of financing is normally less than accounts receivables factoring, but higher than a traditional line of credit.

Asset Based Loan Formula

The loan formula or LTV normally depends on the assets being used to secure the loan.  Most banks and private business finance firms use something similar to the structure below.

·         80% to 85% of accounts receivables in good standing.  This means under 90 days old and the customer’s must have reasonable credit quality.  If any customers are not credit qualified those accounts are removed from the accounts receivables borrowing base.  The same is true for accounts that are 90 days old on the company’s receivables aging report.

·         40% to 50% of eligible inventory.  Asset based lenders prefer finished goods inventory or inventory that has a quick and easy sell value.  They only consider inventory that can be converted to cash in a worst case scenario. 

·         40% to 65% loan to value on equipment is common.  The equipment must have a basis for the lender or bank to be comfortable in the estimated current value.  Just like with inventory, the equipment needs to have current market value for a worst case scenario, such as liquidation.

Who Qualifies for Asset Based Lending?

Most banks and private asset based lenders will look for some evidence of profitability and a positive net worth.  If your business is nearly profitable or has shown some profit in the past it’s normally worth taking a look.  Since the company’s assets are being used as hard collateral to secure the loan the financials of the business do not need to be rock solid, but some evidence of profitability needs to exist along with a plan for future growth and success of the business.

Most asset based lenders require a minimum loan size of at least $500,000.00.  If your business does not require this loan size then an asset based credit facility will most likely not fit your needs.  You could look at other working capital solutions such as accounts receivables factoring or the cash flow loan.

What’s the Cost?

This is why it’s a smart move smart to use the free business loan matching service.  These loans can have tremendous differences in total cost of funding.  It’s common for lenders to use a two tiered pricing structure.  With a two tiered system the asset based lender charges a collateral management fee which is typically a percentage of the amount borrowed and then an additional apr interest charge on the funds employed until the loan is paid back.  The total funding expense if you add these two charges together can range from 5% apr to 30% apr.  That’s why it’s critical to get several loan quotes when looking at asset based lenders.  Even if your credit situation is not the best if you have solid assets to lend against asset based lending can offer working capital with reasonable cost of funding.

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