As its name implies, asset-based lending is a form of financing which is extended by a lender, and is secured by some type of asset appearing on the borrowing company’s balance sheets. These assets could be in the form of inventory, equipment, buildings, or even accounts receivable, but in any case, the borrower would receive an amount which is some percentage of the actual value of the asset(s) being collateralized. Here are some of the most important things to know about asset-based lending.
Assets must be fairly liquid
Any assets used in a financial transaction like this must be liquid assets, i.e. they must be easily convertible into cash. In the event that the borrower defaults on the loan, the lender would have the legal right to seize the asset in question and sell it off to recover any losses incurred by the loan default.
How the borrower benefits
An asset-based scenario might not seem very beneficial to the borrower, since it would be possible that the assets involved in the transaction could be lost to the lender. However, the borrower does benefit in some ways. First of all, the borrower gets needed cash for whatever business purpose was intended. Since the security of the asset significantly reduces risk to the lender, it is easier for a borrower to be approved for such a loan, even to the point where credit history is not a big concern. When the loan is actually arranged, there are generally lower interest rates applied to the loan, again because the lender risk has been mitigated.
Another real benefit to the borrower is that asset-based loans are often setup in the form of secured lines of business credit. This is one of the most useful forms of financing possible, because it gives a small business the financial freedom to draw on the account whenever expenses need to be covered, inventory needs to be purchased, payroll needs to be met, and business growth is being planned. Few other financing options allow for this kind of flexibility and freedom of usage.
Asset-based lending with Capital Financing Solutions
If your small business is in need of funding, and you have business assets which can serve as collateral, we may be able to help you with the funding you need. Contact us at Capital Financing Solutions so our financial experts can discuss ways in which we might assist you to achieve your business objectives.