Asset Based Loans 101
An asset based loan utilizes company assets to secure business financing. The structure often allows the company to borrow from assets continuously, like a revolving line of credit, to cover expenses and investments as necessary.
What Businesses Rely on Asset Based Lending?
The businesses that could benefit from asset based lending are companies that need working capital in order to continue to operate or to grow. These companies may have cash flow problems due to rapid growth.
What Businesses Qualify for Asset Based Loans?
Small and midsized companies qualify for asset based loans. The condition is that they cannot pledge their assets to another lender. If the company has any serious legal, accounting or tax issues, it may not be qualified for the loan.
What Assets Are Used in Asset Based Loans?
The assets the lender will use for collateral are usually the accounts receivable. However, you may also use your equipment, inventory or other assets.
What is the Borrowing Base?
The borrowing base is the money that the lender will let you borrow. The lender determines the base by taking a percentage of the value of the collateral. This is usually about 75% to 85% of the value of accounts receivable. If you are using your inventory or equipment, it is about 50%.
What is the Due Diligence Process?
Before you’re offered the loan, the lender will calculate the value of your collateral, inspect the accounting book and speak to employees. This process will help the lender make a decision that will benefit both parties.
What Sets Asset Loans Apart from Factoring?
Often, people will confuse asset based lending with factoring. They provide similar benefits but are different. Both types of lending will use accounts receivable for collateral. The difference is that with factoring, there is no borrowing money. In factoring, you sell your receivable to improve your cash flow, rather than borrowing against it.
What Do Asset Based Loans Cost?
Of course, the cost of a loan is going to be dependent on the size of the loan, the risk and the type of collateral. Now, loans are also priced with an annual percentage rate. This APR tends to range between 7% and 17&.
When it comes to asset based lending, small and midsized companies benefit the most from what the loans have to offer. They are simply loans that will allow you to borrow against your existing collateral.