Asset-Based Lending

The majority of our prospective clients are undercapitalized companies, that have good performing receivables and are growing faster than their cash flow intake. Asset-based financing works well with manufacturers, distributors and service companies with a leveraged balance sheet whose seasonal needs and industry cycles often disrupt their cash flow.

Asset Based Lending is currently a major source of funding for many companies. Asset Based Lines of Credit are main attractions in today’s competitive business world with fast and steady funding provisions. Since they supply a continuous flow of cash by means of revolving lines of credit, they provide financial support and stability to the day-to-day operations of their commercial borrowers. Each borrowing company’s credit line is determined by the combined worth of its assets. These assets may include accounts receivable and inventory, business equipment, manufacturing machinery, certain contracts with recurring revenue, or personal assets of business owners. Commercial business borrowers then pay a fee to the lender which is based on the amount they borrow. According to the size and determined value of the company being funded, an asset-based revolving line of credit might equal any amount. Aside from normal operational expenses, amounts borrowed can be spent for business restructuring and turnarounds. These advances can also be applied to the costs of company buyouts. Especially during times of economic growth, this type of revolving loan can be vital to facilitating mergers and acquisitions.

How Does Asset-Based Lending Work?

A business seeking funding applies for an asset based lending facility is usually a commercial credit issuing or financing company. The lender then performs an evaluation of the applicant’s assets to determine the approved amount of revolving funding. An approved advance amount on the borrower’s accounts receivable collateral can be up to 85%. Often 50% of inventory value will be approved as a loaning amount. Borrowing companies may need such revolving lines of credit for many different purposes, including purchasing new inventory, restocking current inventory, and meeting payroll demands.

Once the lender approves the borrower for funding and the amount of an asset-based line of credit is established, a lending agreement along with a loan repayment schedule must be accepted by both lender and borrower. Lender then issues the advance amount agreed upon on weekly, monthly, or quarterly scheduled lending dates, as agreed.

The borrower repays these ongoing cash advancements according to the scheduled repayment dates. Once a borrowing company has established a good loan repayment record with the lender, the line of credit may often be increased, usually sooner than it would be with use of a term loan.

The majority of businesses that obtain Asset Based Financing are business-to-business entities.

These companies are most often in the manufacturing, wholesale or retail distribution and sales business sectors. Other companies that use this type of financing are advertising, marketing and promotion and regular upkeep of an office, store, showroom, factory, or warehouse facility. Typically, small to mid-sized businesses are the most in need of asset-based revolving funding since this type of monetary advance transaction can often be completed very quickly. Also, repayment schedules may be customized and less rigid than the schedules a term loan agreement would allow.

Asset-based Lending can be especially helpful to small businesses. This type of funding can be the deciding factor in whether or not they will overcome any existing financial difficulties and attain success. For prompt loan approval, company owners and officers must be prepared to provide detailed financial statements and accounts receivable and accounts payable records. The lender may also require personal financial records from the business owner or owners. Other items required by the lender may be copies of invoices to be purchased and individual customer purchase orders, as well as accurate business equipment listings. In most cases, the company applying for funding must provide the lender with a copy of their articles of incorporation and by-laws.

What Type of Collateral is Most Often Required for Asset-Based Lending?

Acceptable collateral for most asset-based loans (ABLs) includes accounts receivable, inventory, business equipment, and factory machinery. Appropriate inventory may be both finished goods and marketable raw products. In some instances, certain personal assets of business owners may be requested by lenders as collateral.

  • Accounts receivable. – This is the most popular type of collateral among asset-based accounts. Also, this form of collateral has a pre-set value.
  • Inventory takes second place to accounts receivable on the list of collateral most favored by asset-based lenders. This is mainly because inventory lacks the stabilized value and liquidity of accounts receivable. It is necessary for inventory to be sold in exchange for cash to establish value. In addition, inventory aspects like LIFO and FIFO make value assessments difficult.
  • Although they are often acceptable collateral for asset-based lending approval, manufacturing machinery and business equipment are usually more helpful for obtaining a term loan. Their worth as collateral is longer lasting and equal to the duration of their useful operation. Currently, trademarks and customer lists also may be used as collateral for some Asset-Based Lending.

Since both accounts receivable and inventory are renewed throughout the year at periodic intervals, they are in the favored classification of eligible collateral.

At one time, Asset-Based Lenders were the last avenue of business financing possibilities. Yet today they are the most frequently used method of funding for companies lacking an operational track record or acceptable credit rating. Especially for young and growing businesses, asset-based financing is often the best available option. Asset-based lenders base loan granting on collateral rather than on credit ratings, like commercial banks do. However, borrowers must be prepared to pay fairly high rates for borrowing. Also, lenders have the legal right to assume possession of the borrowing company’s assets if payback amounts due become delinquent.

In addition, banks usually take much longer to approve loan applications than asset-based lending agents do, so prompt funding is often not available through banks.

How is Financing Processed by an Asset-Based Lender?

Asset- Based Lenders require each commercial borrower to have its invoice payments deposited to a bank account under the lender’s supervision and control. Such an account is called a “blocked” account. Each day, any excess monies in this account are transferred to a working account which the borrower has the use of. A revised version of this loan procedure (springing dominium) allows the depositing of funds to the borrower’s commercial operations account. After deposit, the amount necessary for repayment fees is transferred to the lender or a blocked account.

Each Asset-Based Lender sets rules by which a line of credit can be drawn against by the borrower. For instance, a borrower could be allowed to finance 85% of acceptable accounts receivable and 70% of net orderly liquidating value (NOLV) of company inventory. The lender monitors the borrower’s assets and financial performance on a daily basis. Cash flow lending agents, by contrast, would most likely consider a monthly report adequate. Asset-based lines of credit are generally extended to borrowers over a time period lasting from six months to three years or longer.

Interest rates on Asset-Based Lenders are usually lower than those on unsecured lines of credit since the lender has the legal right to take possession of the borrowing company’s assets; in lieu of repayment of the loan if the borrower defaults on payments. The reasonable interest rate, convenience of a revolving credit line, fast funding, and lack of requirement for a strong business track record or stable credit rating make Asset-Based Lending very attractive to small and mid-sized businesses. Asset Based Lending is especially desirable for companies in the business sectors of manufacturing, sales (wholesale and retail), and product distribution. Asset-based lines of credit have proven to be a great benefit to both firmly established and startup companies, particularly during difficult or unstable economic times.

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