First of all, what do we mean by the term asset based loan?
There are certainly may definitions available in the market place to choose from, but for the purposes of this discussion we are going to refer to asset based lending in the context that the assets provided as security are the primary focus of the lending decision.
When we speak of bank or institutional business financing, there is lots of asset based loans being provided as banks want hard security as much or more so than any other type of lender. The difference with a bank or institutional lender is that they will not consider lending against assets or taking assets as security unless there is the presence of strong cash flow and credit standing.
With an asset based lender, credit and cash flow are still important, but the value placed on those criteria in the decision making process is lower.
The one exception to this definition is when banks or institutional lenders have their own asset based lending program which will be an extension of their traditional business lending programs, but with higher asset leverage and more operational controls in place.
So based on this definition, when is an asset based loan a good fit?
Let’s drill down on the two most common scenarios.
The business is having some trouble for whatever reason and can no longer secure or retain financing from a bank or institutional lender. In this situation, the risk of lending loss is much higher and requires a greater focus on cash control by the lender and loan protect through the lender’s ability to liquidate the assets for a predictable value if required to repay the loan.
This type of asset based financing is high cost and short term in nature, typically not more than two years. A business accepting this type of loan is either going to be taking one last shot to right the ship or is buying time to orchestrate an orderly wind down in order to maximize the cash generated from wind down.
There are two tiers of asset based lending with respect to business growth. The first tier which is more traditional asset based lending still is providing higher cost financing as the growth period, especially for early stage companies can be quite risky. This again is short term financing in most cases, allowing the business to grow to a size and level of stability that can qualify for lower cost conventional financing.
The second tier of growth financing is for more established businesses that already have a strong balance sheet and past profit performance record, but require higher levels of asset leverage than what conventional lending programs can provide.
Determining the right fit of asset based lender to your particular situation can take some work and time. The best approach is to work with an experienced business financing specialist who can accurately assess your situation and guide you through the market.