Asset Based Lending

What Is Asset-Based Lending?

Asset-based lending is an asset-based loan or line of credit that is secured by accounts receivable, inventory, equipment or other property owned by the borrower. Asset-based lending is just one of the many products that Porter Capital offers clients.

Key Takeaways

  • Asset-based lending involves loaning money using the borrower’s assets as collateral.

  • Liquid collateral is preferred as opposed to illiquid or physical assets such as equipment.

  • Asset-based lending is often used by small to mid-sized businesses in order to cover short-term cash flow demands.

How Asset-Based Lending Works

Many businesses need to take out loans or obtain lines of credit to meet routine cash flow demands. For example, a business might obtain a line of credit to make sure it can cover its payroll expenses even if there is a brief delay in payments it expects to receive.

If the company seeking the loan cannot show enough cash flow or cash assets to cover a loan, the lender may offer to approve the loan with its physical assets as collateral. For example, a new restaurant might obtain a loan by only using its equipment as collateral.

An asset-based loan’s terms and conditions depend on the type and value of the assets offered as security. Lenders prefer highly liquid collateral such as securities that can readily be converted to cash if the borrower defaults on the payments.

Loans using physical assets are considered riskier, so the maximum loan will be considerably less than the assets’ book value. Interest rates charged vary widely, depending on the applicant’s credit history, cash flow and length of time doing business.

Interest rates on asset-based loans are lower than rates on unsecured loans since the lender can recoup most or all of its losses in the event that the borrower defaults.

Example

For example, say a company seeks a $200,000 loan to expand its operations. If the company pledges the highly liquid marketable securities on its balance sheet as collateral, the lender may grant a loan equaling 85% of the securities’ face value.

If the firm’s securities are valued at $200,000, the lender will be willing to loan $170,000. If the company chooses to pledge fewer liquid assets, such as real estate or equipment, it may only be offered 50% of its required financing, or $100,000.

In both cases, the discount represents the cost of converting the collateral to cash and its potential loss in market value.

Special Considerations

Small and mid-sized companies that are stable and have physical assets of value are the most common asset-based borrowers.

However, even large corporations may occasionally seek asset-based loans to cover short-term needs. The cost and long lead time of issuing additional shares or bonds in the capital markets may be too high.

The cash demand may be extremely time-sensitive, such as in the case of a major acquisition or an unexpected equipment purchase.

Let us Break Down and Recap Asset-Based Lending

  • Simply put, asset-based loans are based on assets, generally accounts receivable and inventory, used as collateral. You are putting your future revenue on the line to gain access to money right now. Asset-based lenders will advance funds based on an agreed percentage of the value of the secured assets.

  • Asset-based lending is the business of loaning money in an agreement that is secured by collateral. An asset-based loan or line of credit may be secured by inventory, accounts receivable, equipment or other property owned by the borrower. It is also known as asset-based financing.

  • Asset-based lending refers to a loan that is secured by an asset. Examples of assets that can be used to secure a loan include accounts receivable, inventory, marketable securities and property, plant and equipment (PP&E).

  • With an asset-based loan agreement, also known as an asset depletion loan, borrowers are granted a loan based on their assets. An asset-based loan or mortgage allows you to utilize the assets you have already invested in to secure the cash you need now.

  • On one side of the balance sheet are the assets. Loans made by the bank usually account for the largest portion of a bank’s assets.

  • Asset-based lending is any kind of lending secured by an asset. This means, if the loan is not repaid, the asset is taken. In this sense, a mortgage is an example of an asset-based loan.

  • On the right side of the balance sheet, liabilities include loans, accounts payable, mortgages, deferred revenues, bonds, warranties and accrued expenses. In general, a liability is an obligation between one party and another not yet completed or paid.

  • Lenders verify that all the assets you list on your loan application are verified and responsibly sourced. They do this by reviewing the two most recent statements for any accounts listed on the application. When reviewing the statements, every deposit-no matter how small-must be verified as to its source.