Asset Based Loans are loan secured by a company's accounts receivable, inventory, equipment, and real estate, whereby the asset-based lender takes a first priority security interest in those assets financed. It is an alternative to traditional bank lending because asset-based lenders target borrowers with risk characteristics typically outside a bank's comfort level.
Expert in all facets of collateralized lending, asset-based lenders possess the experience and know-how to structure the proper financing program for their borrowers. They specialize in financing businesses and business transactions involving a broad range of products and services.
Asset based loans are made based the market value of a company's collateral. They focus first on the collateral's cash conversion cycle for repayment and on cash flow second. Asset-based lenders loan money to companies using two main types of credit facilities: .
Good candidates for an asset based loans have tangible or financeable assets that can be used as collateral, such as accounts receivable, inventory, equipment and real estate. These companies may have high leverage ratios, as measured by debt to equity, typically over 5 to 1, or may be marginally profitable companies, companies with a recent history of losses, or with inconsistent cash flow. .
But since the asset-based lender focuses on collateral, the borrower's eligibility for loan qualification is determined from an evaluation of the quality, liquidity, and sufficiency of the borrower's eligible assets. The lender analyzes each asset class to determine its net realizable value in a liquidation situation. It then uses this information to exclude certain assets from financing and set maximum advance rates. .
If the advance rate established by your lender creates adequate liquidity, asset based lending may be an appropriate solution to your company’s current financial requirements. .
Asset based loans provide capital for a wide variety of financial requirements including:
The primary difference between commercial banks and asset-based lenders is where they each look first for repayment: The bank looks to cash flow for repayment first, then collateral; while the asset-based lender looks to collateral first. Since banks underwrite cash flow as their primary repayment source, they typically require less collateral controls and monitoring but more financial covenants.
For companies that are "asset heavy," an asset-based credit facility may be able to make more funds available because the loan is not based strictly on the anticipated levels of cash flow. Additionally, the structure often requires fewer covenants, thereby providing more flexibility for many borrowers.
The level of controls and monitoring by the asset-based lender is directly related to the credit-worthiness of the borrower. Typical controls include:
Ongoing audits are also used to monitor the account. The asset-based lender will audit the borrower's books and records periodically to test the records' accuracy and validity and to substantiate collateral values as represented by the borrower.
K2 Commercial Finance works directly with lenders who specialize in Asset Based Loans. These loans are often useful to secure funding for clients when the availability of commercial real estate financing is not enough to meet a specific funding need.
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