What is asset-based lending?
When businesses need inventory, they may turn to asset-based lending. Asset-based lending is a form of lending based on the assets that a business has. These assets are put up as collateral to lenders. If the business can’t pay back the loans, then the assets will be taken by the lender to help repay the loan. Sometimes, businesses need inventory, and they don’t know where to turn to get the funds to buy it. Asset-based lending can help with that issue.
In the simplest definition, asset-based lending is any form of lending that’s based on an asset. What that basically means is that if the loan is not repaid, then the asset is taken. That’s why a lot of small business owners don’t like the idea so much. If their business idea doesn’t pan out, and they put up an asset, and then they have to give up that asset, then they’re in a worse place than they were before, and they may not be able to make a start again. More often, the term is used to talk about lending to big corporations and mid-sized businesses who want to use assets that aren’t normally used in other loans. Usually, these loans are connected to equipment, machinery, accounts receivable, and inventory.
This kind of lending is often done when ordinary routes of getting funds, like selling equity to investors or ordinary unsecured bank lending is impossible. It’s not one of the most common kinds of lending because it puts businesses in a seriously bad position if they can’t repay the loan and have to lose their assets. It’s usually used after the other forms of funding are closed off, for one reason or another. These kinds of loans are usually given because the company was unable to get the capital in the ordinary marketplace or have to get more immediate capital for big project financing. It is often accompanied by high interest rates too, and it can be extremely lucrative for the lending company. One major bank made more money from asset-based lending than they did from any other kind of lending or corporate business.
An asset-based line of credit is often designed for the same function as an ordinary business line of credit – to let the company bridge itself between the time of payments it receives and the ordinary business expenses. The main timing issue usually has to do with what are referred to as accounts receivables – the delay between selling a good or service to a customer and then getting payment for it. Since that gap can be quite large, and the money needed to grow the business needs to be immediate, there are often these kinds of loans to help the business get going and stay going even before they’re received payment.
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