The Asset-Based Loan:
No Longer Just Last Recourse
Business Financing

An asset-based loan is another excellent option for a company looking for cash to grow or to cope with cash-flow challenges.   

These days, many business owners and financial managers know a lot about rejection. Their education comes at the hands of bankers who are all too frequently denying applications for new credit or curtailing existing business credit lines, if not closing them altogether. From start-ups to well-established companies, the story is often the same.

If your company is trying to get through a seasonal downturn or you have the enviable problem of funding a growth spurt, an asset-based loan may be your solution. And, as is quite common for this type of business financing, your loan could be structured as a new business line of credit, giving your firm not only the cash it needs now, but also maximum financial flexibility for future needs.

In the past, the asset-based loan was characterized as a financing strategy of last resort – a lifeline appropriate only for troubled companies. Today, though, that’s no longer the case. Many customers for these loans are successful companies that are growing so rapidly that traditional commercial bankers can’t or won’t keep up.

Even if your company is not currently in need of a cash infusion, you can unlock the value of its assets for the future – expansion, acquisition capital, recapitalization, or any other purpose requiring business capital – with a business line of credit that can be used at your discretion.

How Does Asset-Based Lending Work?

In an asset-based loan situation, a lender evaluates one or more of the your assets, which might include its accounts receivable, machinery and equipment, real estate, inventory, or even contracts. If satisfied with their value, it will make a loan against these assets – often in the form of a new business line of credit – holding them as collateral until the loan is paid off or the credit line is closed.  

What is the difference between an asset-based loan and account receivable factoring?

Receivables factoring is the actual sale of invoices to a third party for cash; asset-based lending is a loan that can be secured by many different types of business assets, including receivables.

How is it different from a traditional bank loan?

The differences are many and they are significant. A bank loan is based on an in-depth evaluation of a company’s financial position, its credit worthiness, and its projected performance. In addition, banks are constrained by a plethora of regulations, which have the effect of severely limiting their flexibility. Because asset based lenders are not banks and not bound by banking rules, they can freely target their funding to companies outside the sphere of traditional lending, with a focus on assets, management expertise and growth potential, rather than current and historical financial performance.

The size of a business line of credit or loan is based on a percentage of each asset’s appraised value, and the percentages vary according to the type of asset. For example, the percentage lent on machinery and equipment – the so-called “advance rate” – might be as much as 80% of its appraised value, while the advance rate on accounts receivable from creditworthy customers could be as much as 85% of the receivable amount.   

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The collateral will be monitored and evaluated throughout the life of the loan, and as asset values change, loan adjustments might be necessary. If an asset-based loan is secured by equipment, for example, the lender will want to periodically ensure that business still owns it, it is serviceable, and it is where it is supposed to be.

The prospect of having someone constantly monitoring your business assets might seem invasive at first, but it is necessary to make asset based lending work. Their secured position generally gives asset-based lenders much more flexibility than traditional commercial lenders, but the fluid nature of certain types of assets (inventory, for example) means their security will be in constant flux. So from the lender’s standpoint, it makes sense that it would want to be aware of changes in the collateral securing its funds.

The other significant price for this flexibility is that the finance charges tend to be higher than traditional bank loans – though actual rates can vary widely, depending upon the nature of the collateral securing the loan, and other factors, such as the borrower’s creditworthiness.

How to Find an Asset-Based Loan

There are several hundred non-bank lenders of all shapes and sizes actively making asset-based loans in the U.S., Canada and Mexico. From smaller finance companies that specialize in certain asset classes, specific industries or limit their lending to customers in a particular region, to major lenders with a comprehensive menu of product lines and wide geographic coverage, there is most likely one that can offer financing suitable to your business.

For companies that are interested in exploring their asset-based loan options, the best place to start is by discussing your needs with a trustworthy commercial finance professional who can help you locate potential lenders matched to your needs, including the type and size of your company, its location, and the financing you are seeking.

Many kinds of companies benefit from asset-based finance, but there are some industries that find this technique particularly valuable. Here’s a sampling:

  • Automobile parts and supplies manufacturers
  • Department stores
  • Food processors/manufacturers
  • Groceries and related products
  • Lumber and other building products
  • Metal goods manufacturers
  • Motor-vehicle supplies and parts
  • Radios, TVs, consumer electronics
As is the case with any loan, price is an important consideration, so it makes sense to comparison-shop. If you align yourself with a competent and ethical professional who deals with a number of different lenders, he will be able do that for you.

A company that make use of an asset-based loan has working capital financing that can be used to fuel growth and weather cyclical fluctuations in cash flow. There is now widespread acceptance of this kind of business financing by companies of all sizes, and with asset-based finance visible on the radars of business owners and finance professionals across the entire spectrum of industry, more lenders are entering the field to meet the surging demand.

Since their appetites and capabilities differ, your goal should be to build a solid relationship with a lender that truly understands your company’s current needs and its long-term objectives. The result will be a partnership giving you the resources and the financial flexibility to move your business forward.

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