The Benefits of Asset Based Lending

By: Kris Koonar

Simply put, asset based lending is a loan that is secured in exchange for the assets of the company like accounts receivable, inventory and other balance sheet asset items as collateral. Also known as asset based financing, it a straightforward concept which emphasizes on matching the company's assets to the borrowing needs. Most of the traditional bank loans are based on the balance sheet ratios and the cash flow predictions.

The assets of the organization are the major factors on which the loan is dependent, in asset based financing. This leads to greater borrowing capacity than the traditional banking approach. The major advantage of such loans is the availability of cash for the routine requirements of the company. The collateral would generally be the accounts receivables, inventories, machinery and equipment, real estate and other tangible assets.

Benefits of Asset Based Lending

Low rate of Interest: Compared to the unsecured loans, the rate of interest of such asset based finance is much lower. This is because the lenders money is safe with the availability of the collateral item on non-repayment of the loan.

Liquidity: This gives greater liquidity from a strong cash position. The assets are also available when the need arises for working capital loan, to bridge the financial gap in the business life cycle. As the company grows, the financial needs grow. At the same time for the growth the liquidity is very relevant. The loans are available regardless of the economic condition of the borrower.

Profit and Loss and credit history: One major benefits of the asset based financing is that the asset value is of relevance to the financing company and not your credit history or the cash flow status.

Quick Finance: The financing organization lends the amount required quickly with least hassles. Thus, when there is an urgent need for finance to capitalize on a great business opportunity, it can be accessed with the help of the asset pledged. It is thus useful to meet the seasonal need, rapid growth, acquisitions etc.

Commitment: The asset-based loans have flexible repayments plans. Short-term asset based loans get paid off quickly from the accounts receivable and the inventory.

Many companies provide customized lending, depending upon the needs of the organizations. Some companies also have expertise in specific industries that is beneficial to understand the finance needs of the company.

Financial discipline: The borrowing availability is dependent on the advance rates on the accounts receivables. This makes the borrowers collect the receivable amount in a more disciplined manner. Moreover, as only the completed products are eligible for financing, the company improves on efficiency in the production process.

Few financial covenants: The asset based loans require only a few covenants like debt service coverage and net worth as they are based on the collaterals.

In tough financial conditions, the lender shows the willingness to give more time to the borrower as he has the collateral to protect the loaned amount.

Industry expertise: The financing companies have expertise in dealing with the retailers, manufacturers, distributors and importers within industries dealing with automotive parts, apparel, consumer products, food and beverages, steel and transportation. Thus, these companies extend help to nearly all businesses.

The asset based lending is useful when you have a requirement for working capital and funds for new acquisitions and major capital expenditures. It also fills in for the funds required restructuring the business and to take care of other finance needs.

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