All You Need to Know About Asset-Based Loans
A business loan with a company asset acting as collateral, is known as an asset-based loan. Usually, these loans are made to work as revolving lines of credit. With this design, businesses can borrow from assets continually to cover investments or expenses as the need arises.
Asset Loan Users
Asset-based loans are used by businesses looking for working capital for operational costs or expansion. Usually, companies getting this loan are facing cash flow problems as a result of rapid growth. In such a scenario, lending facilities are helping companies manage this typically difficult stage.
Qualifications for Asset-Based Loans
Asset-based loans are often given to small to medium-sized enterprises that own finance-able assets not currently held as collateral for loans from other lenders. In case the assets are pledged to another lender, that other lender should agree to subordinate its possible. Also, the lender should have zero legal, tax or accounting problems that can possibly encumber the properties. Asset-based loans range from $750,000 to $1,000,000 in utilization requirements.
Asset-based loans usually have accounts receivable as the primary collateral. However, equipment, inventory, and other assets may also be used.
The amount of money lent to the borrower is known as the borrowing base. It is a set percentage of the collateral value pledged. When borrowing against their account receivable, companies can usually get 75% to 95% of its total worth, while the borrowing base of inventory and equipment is usually 50% or less.
Due Diligence of Loan Provider
Before a loan is offered, a lender has to do its due diligence. This task includes calculating how much the collateral is worth, inspecting the borrower’s accounting book, and checking whether there are encumbrances on the collateral. Lenders normally go to the site and talk to relevant personnel, but this comes with a fee.
Cost of Asset-Based Financing
The cost of asset-based financing is dependent on three essential issues – how big the loan is ,the type of collateral, and general risk. Such loans are often priced with an annual percentage rate (APR) – between 7% and 17% – although other services may be charged as well.
Asset-Based Loan Versus Factoring
Many people think asset-based financing is factoring and vice-versa. Part of the confusion is due to the fact that both make use of accounts receivable as their main collateral. But of course, there are differences. In factoring, for instance, receivables are sold instead of the company borrowing cash against them. Receivables are individually sold as well as ledgered, rather than financed as one. Finally, the factoring company is involved in collections, allowing the lender to work with smaller – or problematic – businesses that would not qualify for an asset-based loan.