The Basics of Asset Based Lending
Asset-based lending is the kind of financing which is based on physical assets belonging to you or your company rather than on your company’s credit history or its overall strength. This kind of funding can be invaluable to young companies just starting out, because they often have very little history to show, and have not yet stabilized to the point of showing consistent profits. Compared to conventional loans from lending institutions such as banks, asset-based loans are easier to obtain, because they are not based on credit history.
Advantages of asset-based lending
As mentioned above, it’s not necessary for your company to have good credit, but if you have valuable assets such as your receivables or some kind of expensive equipment, those can be used as collateral to obtain a loan from an alternative lender. This takes far less time than a conventional loan would, because not nearly as much paperwork is required, and this can be very helpful, given the pace of business. The financing you secure through asset-based lending can thus help meet any urgent cash flow demands, such as for payroll, the purchase of inventory, payment for suppliers, etc.
Structuring of asset-based lending
Most commonly, asset-based lending is set up in the form of a revolving line of credit transaction, which is highly beneficial to a young company. The amount of that line of credit depends largely upon the value of assets being used as collateral, e.g. machinery, real estate, inventory, and Accounts Receivable.
Most of the time, you will be able to borrow an amount in the neighborhood of 80% or 85% of the actual value of the assets being used, but you would never receive 100% of the appraised value of collateral. For these transactions, the types of asset most commonly used are Accounts Receivable, because they represent solid incoming revenue, and are therefore considered the least risky of any form of collateral.