Basic Guide to Asset-Based Loans
An asset-based loan is a business loan where a company asset serves as collateral. Usually, these loans are made to work as revolving lines of credit. This design allows a business to keep borrowing from assets to fund investments or operational costs as needed.
Asset Loan Users
Businesses seeking working capital for expansion or operational expenses can use asset-based loans. Businesses that apply for this type of loan are usually those experiencing financial trouble caused by rapid growth. In such a scenario, lending facilities are helping companies manage this typically difficult stage.
Qualifications for Asset-Based Lending
Asset-based financing is typically given to stable small to medium-sized companies with finance-able assets that no other loans are currently secured against them. If the assets are indeed pledged to another lending company, that company has to agree to subordinate its position. Also, the lender should have zero legal, tax or accounting problems that can possibly encumber the properties. Utilization requirements for asset based loans are generally between $.75M to $1M.
Assets that May Be Used as Collateral
Accounts receivable is the usual main collateral for asset-based financing. But other assets are also acceptable, such as equipment and inventory.
The borrowing base is simply how much money lender will allow the borrower to borrow. It is set as a portion of the collateral value which has been pledged. Companies can usually borrow about 75% to 85% of their accounts receivable; for equipment and inventory, the borrowing base is normally 50% or below.
Lender Due Diligence
Lenders do their due diligence process prior to offering a loan. This task includes calculating how much the collateral is worth, inspecting the borrower’s accounting book, and checking whether there are encumbrances on the collateral. Lenders normally go to the site and talk to relevant personnel, but this comes with a fee.
Cost of Asset-Based Loans
There are three main issues that affect the cost of an asset-based financing: loan size, collateral type, and general risk. In most cases, this type of financing is priced with an annual percentage rate (APR) – about 7% to 17% – but it’s common for lenders to collect charges for other services too.
Asset-Based Loan vs. Factoring
Asset-based financing is often mistaken as factoring, but they are not the same. A big reason behind this confusion is the fact that both products use accounts receivable as their primary collateral. But of course, there are differences. In factoring, for instance, receivables are sold instead of the company borrowing cash against them. Receivables are not financed altogether but sold and filed one by one. Finally, because factoring companies are involved in the collection process, they can help smaller – and probably struggling – businesses that are not eligible for asset-based financing.