Asset-based lending or asset-based financing is considered a kind of business that deals with loaning money and collateral secures it. A line of credit or asset-based loan remains secured by a borrower’s accounts receivable, inventory, or equipment. The huge industry of asset-based lending caters to businesses rather than consumers.
Selecting lenders
Numerous banking institutions work as asset based lenders as they offer asset-based lending. These banking institutions assist companies in financing their operating capital deficits like payroll, inventory purchases, and various other operating expenses. Companies need to reach out to lenders that specialize in asset-based lending. Again, the lender should cater to exclusive business requirements. Some criteria for choosing a lender comprise credit availability, interest rate, and the related terms and conditions.
The working process of asset-based lending
Numerous businesses take out loans, and they also get lines of credit so that they can meet their regular demands of cash flow. For instance, businesses might get a line of credit for covering their payroll expenses even when they see a little delay in payments. When the companies that ask for the loan fail to show sufficient cash assets or cash flow for covering a loan, then the lenders come forward to sanction the loan with their physical assets, and they work as collateral. For instance, a new restaurant might get a loan when it uses its equipment in the form of collateral.
Every lender prefers highly liquid collateral as securities, as he can change them to cash if he sees that the borrower can’t make the payments. A loan that uses a physical asset is regarded as riskier. Hence, the max. Loan tends to be remarkably lower compared to an asset’s book value. Again, the interest rates too continue to differ widely based on the cash flow and credit history of an applicant.
Pros of asset-based lending for a borrower
Borrowers opt for asset-based lending due to various reasons, some of which are:
- A borrower finds an asset-based loan to be quicker and smoother to get compared to lines of credit or unsecured loans.
- The asset-based loans comprise fewer covenants.
- Asset-based loans carry a lower rate of interest in comparison to other options for funding.
The pros of asset-based loans for a lender
A lender opts for asset-based loans for various purposes:
- An asset-based loan seems to be lesser risky because it collateralizes with assets.
- When a borrower turns into a defaulter, the lender gets the assets, and they are utilized for securing the loan as well as liquidating them for settling the outstanding amount.
The verdict
As asset-based lending hugely depends on the quality of the asset, this kind of financing seems to be hugely advantageous to a company when it experiences remarkable growth. At times, companies also need asset-based lending when they need cash urgently. Regardless of the reasons to get in touch with asset based lenders, asset-based loans can turn into a competitively priced financing and flexible choice for countless asset-rich businesses due to more reasons than what meets the eye.
