Any kind of commercial venture needs funds to grow. An enterprise cannot survive just because it has a competitive product, a promising market or an excellent network of distribution. The foundation of all this is money.

Business owners and entrepreneurs must have sound knowledge of financing, how indispensable it is, and last but not the least, why one form of financing is considered better than another form. Even though, you are starting a very small business as an experiment, yet you need finance from an external source. Among the various options available in today’s commercial world, Asset Based Lending is considered as a wise option because it is flexible and cost effective.

What is Asset based lending?

Asset based lending is a kind of a specialized loan offered to businesses, who hold assets, as collaterals to the financing companies. This provides the borrowers with high financial leverage and marginal cash flows. As just mentioned, this type of lending uses assets such as receivables and inventory as collateral for the loan. In asset based lending, the quality of the collateral becomes preeminent in determining the creditworthiness of the customer. While traditional bank relies a lot on balance sheet ratios and cash flow projections as a loan criteria, asset based lending uses a client’s business assets as its primary factor for lending. As a result it usually gives a borrower far greater borrowing power than is possible through a traditional cash flow banking means.

Asset based lending is Ideal

In the contemporary competitive commercial arena, every venture needs more than one resource to survive and grow. In the absence of adequate resources, even the best performing companies may suffer either losses or face serious obstacles, in the way of its further expansion and growth. In such a scenario, asset based lending comes as a godsend grace, providing the much needed finance. It is not only cost competitive and effective, but also more versatile and flexible than most of the other lending.

Advantages of asset based lending

There are a number of advantages of assets based lending. The most important advantage is the less rate of interest as compared to an unsecured loan. What accounts for the lower interest rate is the fact that in the asset based lending; the lender’s money is always safe, even in a case of a default by a borrower. The lender can always recover his money by confiscating the securities and assets of the borrower.

Asset based lending is suitable for any kind of financial expansion or growth in businesses. One can also resort to asset based lending for management of buy-ins and buy-outs, business takeovers and mergers, refinancing existing business loans as well as turnaround financing. Asset based lending is determined by the value of inventory, accounts receivables, fixed assets. The borrower gets revolving credit and term loan against the security of the assets. Usually term loan up to 40 % of the total value of assets can be sanctioned. The term loan may end between 5 and 15 years, depending on the life of the assets. Asset based lending focuses on collateral and liquidity followed by cash flow and leverage. It provides the borrower with more liquidity at the same time requiring less formal financial agreements.

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The worldwide lending industry is a multi-billion dollar industry where people borrow from banks, financial institutions and other private lenders. In the last couple of years, the lending industry has gone through an evolution and has given way to social lending as the new and promising mode of lending. Also known as peer- to- peer lending or person to person (P2P) lending, one of the first companies to set the base for social lending are Zopa, Prosper and more recently LendingClub.

Zopa is considered the first social lending marketplace in the world and its roots are in the United Kingdom. With the launch and immediate success of Zopa, other similar peer to peer lenders have sprung up like Prosper in the US, Boober in Netherlands and Smava in Germany.

If you are wondering whether the P2P loans offered at the social lending sites are worth it or not then the answer is most likely yes. There is not much of a difference as far as the P2P loans from these lending hubs and from a bank is concerned. The difference lies in the fact that there are no banks, no long procedures, and no middleman and above all the entire process is transparent for both the lenders and borrowers (no more hidden hard to find loan agreements!).

The main objective of the social lending hubs is to offer an online loan with the best interest rates and to make customers feel like they are borrowing from a friend or community. This peer to peer borrowing is increasingly being seen in a new light and is being considered as a part of community borrowing (which was more traditionally offered by small local community banks).

Other benefits:

1.class, which they can add to their portfolio because it doesn’t fall under an investment or even a savings account.

2.Choosing interest rates and loan repayment: There are several benefits for lenders as well as borrowers. In social lending hubs like Zopa or Prosper, lenders have the freedom and the flexibility to choose a loan repayment time period as well as the interest rate on the p2p loan.

3.Active community participation: one of the salient points is that this kind of a lending hub make borrowers feel as if they are following from an actual person and not an organization or a faceless institution. Hence it helps in developing a strong community feeling.

Lenders at any of the social lending websites have the power to set a minimum interest rate that they want to earn and can bid in an increment of $50 till $25,000 through loan listings. Borrowers can create a loan listing for a period of 3-years, and borrow an amortized and unsecured loan of up to $25,000 and also provide the maximum interest rate that they will be able to pay a lender.

The success of Zopa lies in its facts and figures. They are the largest lender today and have loaned out in excess of $930,000. The return on investment for lenders has been around 5.01%, which is healthy especially in the wake of the fact that social lending is still in its nascent stages. One of the top lenders even got an ROI of 19.8% on social lending websites.

The Lenders

By now you are probably thinking who these lenders really are? Are they banks in disguise or are they really other people? The truth is that they are really people. Let’s take Zopa and Prosper for example. Both the social lending hubs are backed by Benchmark Capital who also funded eBay. Zopa or Prosper are the best alternatives that anyone can have to banks or other financial lending institutions, however they are restricted to the UK and US markets.

The current business model of Zopa is based on a 1% exchange fee that borrowers are paying them upfront. In return, Zopa is offering borrowers a better interest rate by cutting out the bank middleman. More than that, a borrower will have more control of the entire lending process and has the flexibility to establish an interest rate.

Zopa is the acronym for Zone of Possible Agreement, and its lenders include only U.K. residents who are over 18 years of age. To qualify as a lender, a person needs to have a valid bank account and a high personal Equifax credit rating. There are two restrictions for becoming a lender and they are:

•Lenders have to be individuals and not businesses.
•Lenders will not be allowed to have anything in excess of £25,000 ($47,000) in outstanding loans at a given point in time.

The American counterpart of Zopa is Prosper and they also handle maximum loan of $25,000 at a time. At this point the future of social lending looks bright as it has now hit New Zealand and Australia with the first peer to peer lending hub in Australia to launch shortly being Lending Hub (you can see their site at lendinghub.com.au and their active blog at blog.lendinghub.com.au) which will offer P2P loans with a strong community focus to ensure a truly social experience for both borrowers and lenders rather than just being a transactional online loan tool.

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Generally speaking, there are two types of mortgage borrowers: prime and sub prime. Borrowers with good credit scores and a minimal amount of debt that is kept current are considered prime borrowers and they therefore qualify for better rates. If the opposite is true, that is, the borrower has a low credit score, too much debt, and a history of late payments, he will be marked as sub prime. As a rule of thumb, a lender will consider a borrower with a credit score that is less than 660 and more than two payments that have been more than 30 days overdue in the last year, and debt to income ratios of over 50%. Having had a foreclosure or bankruptcy in the prior five years will also designate a borrower as sub prime, even if the above factors are not an issue. Banks base their interest rate on the risk they take on the borrower, so it goes without saying that sub prime borrowers will have a less favorable interest rate – pret hypothecaire. Rising interest rates and falling home prices have combined to contribute to the default on hundreds of thousands of these so-called “sub prime loans”, and now banks are not willing to lend to any except prime borrowers. One of the first steps a potential home loan borrower should take is to shore up his credit rating so that his score will meet the bank’s more stringent criteria. Bringing down the level of debt and being diligent about the payment of bills will show a lender that recent credit history is better. He should also make sure to keep good records and be willing to document all of his recent “good” credit practices. If, however, the borrower is attempting to re-finance a home that has a mortgage that is higher than the value of the home, it is unlikely any lender will be willing to take it as collateral. The first thing anyone in this situation is advised to do is make an appointment with an experienced mortgage broker. Such a broker can find avenues the borrower may not have thought about, as well as advise him in repairing his credit, and what other steps he may have to take to qualify for a loan The other side is that an experienced, reputable consultant will not string a client along-he will tell him if the situation is unworkable. Regrettably, there are brokers who are only interested in getting an application fee, even when there is no chance that a mortgage will be granted.

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