Asset based lending is just lending that’s guaranteed by some kind of asset. If the loan is never paid back, the asset gets taken away. A mortgage is a kind of asset based lending, in a way. However, much more commonly, the terminology is used in conjunction with lending to big corporations or businesses that use assets that traditionally aren’t used in other kinds of loans. Think of it like one group giving money to another group, and if that group doesn’t pay it back, the lending group takes some of the possessions from the group they lent to.
Companies often have a lot of assets, and asset based lending takes advantage of this to make secured loans. They might loan a lot of money because they are guaranteed to get the assets of the company, if that company doesn’t pay up. These loans are often tied equipment, machinery, accounts receivable, or inventory.
This kind of lending is used most often when the company wasn’t able to get capital in the traditional way, like raising funds. They might have been unable to raise funds in the normal marketplace. They might need a big surge of immediate capital for something like debt purchasing, mergers and acquisitions, or inventory purchases.
A line of credit that is asset based is often made for the same reason that a normal line of business credit is designed, and that’s to let the company bridge the gap between the cash-flow timing and its expenses. The main timing issue focuses on what are known as accounts receivables. That is the delay between doing a transaction with a person, and getting payment for it.
Businesses can sometimes look through the different asset based lending companies according to what their lending rates, whether or not they have international A/R experts, what their inventory advance rates are, and their A+ BBB rating. It’s important to choose companies that have excellent ratings across the board, in all areas, because there’s not reason not to with so many choices out there. Basically, it comes down to the rate of capital at the interest rate you get. Plus, an intimate knowledge of the pricing and underwriting criteria of asset based lenders also helps.
Asset based lending used to be considered the last resort when it came to getting financing for your business, but it’s now seen as more and more common for businesses that either lack the track record or credit to get the kind of financing that has been seen as traditional.
In general, asset based lenders look at the collateral’s quality instead of the credit ratings. Borrowers pledge all sorts of things like equipment, inventory, and receivables. Banks are often constrained in giving this kind of lending.
Banks not ever accept transactions that have higher debt-to-worth rations than five to one. Asset based lending companies that are not banks or who are separate entities don’t have to deal with constraints like that.
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