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.
