Asset Based Loans - An Option Best Suited For Business

Most generally, asset based lending refers to any type of lending where assets are

required as a condition of the transaction and taken by the lender if the borrower defaults. This form of lending is also termed secured, as distinct from unsecured, lending. As an example, private mortgage loans are asset based financing. Credit card borrowings, by contrast, are not asset based.

This definition is so broad that it reduces its usefulness since it fits the description of many loans, including consumer loans. In a practical sense, asset based finance refers to a narrower lending segment focused on commercial or business loans. In this more restricted sense, asset based borrowers gravitate to being small or medium size enterprises firms or perhaps the subsidiary or associate of a large corporation.

When used in this more limited sense, asset based borrowers are mainly small-to-medium sized firms or the subsidiaries of large corporations. Lenders include specialist lending units within both corporate and investment and banks, as well as niche lenders focused more or less exclusively on asset based financing.

Used in this more restricted sense, asset based finance refers to loans secured against tangible assets including inventory, accounts receivable, machinery and equipment, commercial vehicle fleets as well as intangible assets like trademarks and intellectual property.

Factoring arrangements may also be structured based on a pledging, rather than assignment, of receivables. In a pledging structure, the receivables continue to be reported as an asset on the balance sheet of the borrower with a notation in the Notes To Accounts to disclose that the receivables have been used as security for a debtor in possession.

Large organizations, particularly those that can tap public debt markets by issuing debentures, notes and bonds, are not themselves frequent participants in asset based loan markets, although it may from time to time be convenient for their subsidiaries to access this form of financing. Large corporations generally have lower cost borrowing alternatives available. By contrast, small-to-medium firms have more limited borrowing options and hence tend to be the most active asset based borrowers.

When assessing a loan request, lenders assign often assign the asset a greater weighting than the underlying cash flow stream of the borrower. As a result, the lender sets a low priority on requesting the borrower document proof of its cash flow or income.

An asset based line of credit will generally have a revolving, rather than fixed, credit limit that fluctuates based on the operational needs of the borrower. This requires the lender to regularly monitor and inspect the borrower.

by: Ben Pate

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