Lending
What is Asset Based Lending?
March 4, 2009 by Financemyhome · Leave a Comment
Perhaps you have heard the term asset based lending. Well, this type of lending really refers to any type of lending where it requires the security of some kind of asset. This way if the borrower is not able to repay the loan, then the asset can be taken to help satisfy the money that the lender has lost. However, this type of lending usually more commonly refers to lending that is done to large corporations and businesses with assets that other loans usually don’t use. These loans often are tied to things like equipment, accounts receivable, inventory, machinery, trademarks, intellectual property, and more.
When is This Lending Used?
So, you may be wondering when this type of lending is used. Usually it is done for companies that want to raise funds. Asset based lending is often a last resort when companies are not able to go through other lending options. In many cases this may mean that the company is dealing with very bad financial problems. This type of lending is much like subprime lending. Usually you’ll find that this type of a loan comes with interest rates that are very high. However, the lenders are often able to make quite a bit of money doing this type of lending.
Features of These Loans
There are a variety of features that come with asset based loans. One feature is an asset business line of credit. This is much like a regular line of business credit, but it is done with an asset to back it up. These lines of credit can fluctuate based on the balance that comes through accounts receivable, so the lender has to audit and monitor the borrower on a regular basis so it knows the size of accounts receivable. However, on the good side, it can allow for larger lines of credit as well, letting companies borrow larger amounts of money. Some other types of asset based lending include factoring of receivables and pledging of receivables. These types of asset lending make the receivables the asset that the borrower is borrowing against.
Differences Between Commercial Financing and Asset Based Lending
So, what are the differences between regular commercial financing and asset based lending? Well, the main focus of asset based lending is all on the collateral, giving leverage to the lender. Usually borrowers are given more liquidity when they go with an asset based loan. You’ll also find that these borrowers have higher financial leverage than those who go with traditional commercial financing do.
The Target Market
Most lenders that do asset based lending have a target market. They provide solutions to meet financing needs of specific people. Usually the target market is for businesses that have a revenue of at least $30 million, all the way up to about $250 million. These services are usually geared towards distributers and services manufacturers as well. Even those who do have revenues that are more than $250 million can be targeted as well. However, certain lenders usually have various specific industry groups that they want to reach out to, and this can vary from lender to lender.
Choosing a Lender
For companies that want to go with an asset based loan, choosing a good lender is very important. There are a variety of things to consider when making this choice though. Most companies will want to go with a lender that does not charge pre payment penalties. Other products should be available as well when you are trying to find the right lender. Good lending companies will offer transitional capital, which can allow a company to go from an asset based loan to some other type of commercial financing if their finances get better and allow it. These are just a few important things to look for when choosing a great lender for an asset based loan.
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