Asset Based Lending Can Be An Alluring Funding Solution For Asset Rich Firms

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Asset based loan refers to debt financing supported by assets as collateral or security for the loan. Ownership of the collateral transfers to the lender if the borrower defaults on the loan. This form of loan is also sometimes more generically referred to as an equity or secured loan.

This type of funding can be vital for many non-prime quality debtor in possession, particularly small private firm that generally have limited financing options. Borrowers in this market segment usually have a credit history that is in some way unsatisfactory.

The borrower may not have a credit history or it is very short. Worse still, it may point to a poor repayment record. The borrower may not yet have sufficient cash flow to support a conventional loan. Whatever the case, an asset based loan may serve a critical funding need for an asset-rich borrower.

Lenders in this segment typically limit the loans to a 50 or 65 loan to value ratio (LTV). For example, if the assessed value of an asset is $2.0 million, a lender might lend between $0.5 million to $0.65 million.

A lender usually feels comfortable that a 35-50 percent equity stake in the asset by the borrower represents enough equity to allow the lender, in the case of foreclosure, to take possession of the property, sell it and use the proceeds to recover its full loan amount and cover any outstanding expenses. Those expenses likely include outstanding accumulated interest, taxes and legal fees.

An asset based loan may be established with a revolving credit limit that fluctuates in line with the business needs of the borrower. If set-up this way, it increases monitoring demands placed on the lender and so higher fees may be applied.

Asset loans include various consumer financing such as a standard, home mortgage loans sourced from retail banks or financial institutions. However, from a practical viewpoint, this form of financing is used to describe a narrower lending segment focused on commercial rather than consumer lending.

In this narrower sense, it refers to loans secured mostly by tangible assets including property (particularly commercial property), inventory, debtors or accounts receivable, plant & equipment and other machinery, commercial vehicles (cars, trucks, forklifts, cranes, and so on). Intangible items may also be used as security including trademarks, patents, documented technology and other forms of intellectual property.

Asset-based borrowers are mostly small or medium businesses as well as subsidiaries of major corporations. These borrowers have few financing alternatives. They are considered non-investment grade by debt investors.

In conclusion asset based lending can be a convenient and vital form of financing for many borrowers, particularly smaller firms with less-than-prime credit histories. Like most loans, this form of financing usually involves set-up fees, ongoing administration fees and break fees. These fees are usually a tiny fraction of the total loan value. The precise structure and level of the rates and fees will reflect the nature of the risks assumed by the lender for the debtor in possession.

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