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.

Business Distress

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.

Business Growth

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.

Click Here To Speak With Business Financing Specialist Brent Finlay

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While the category of asset based loans and asset based lending is continually growing in terms of application and money supply, the overall financing category remains confusing and misunderstood by many business owners.

The general idea is that an asset based lender is more focused on the market value of the underlying security being offered and its liquidation pathway in the event of loan default.

While this is a strong underlying theme, this financing category is goes much farther a field in almost every direction.

There are asset based lenders that only focus on one type of asset such as inventory lenders, purchase order financiers, accounts receivable factors, equipment lenders or leasing companies, real estate lenders, and so on.

By focusing on a particular classification of asset, the lender can more accurately assess the market, set up a predictable and efficient liquidation pathway, and attract investor or lender financing to fund their asset based loan model.

But there are also asset based lenders that work across categories such as working capital models that finance against accounts receivable, inventory, and potentially equipment. Or term lenders that focus more on equipment and real estate.

And there are also different slices to the market in terms of bank and institutional lenders versus private lending sources.

The more the lending decision is based on the value of the asset alone, the higher the rate is likely going to be. Because banks also participate in asset based lending, greater scrutiny is applied to lower cost forms of asset based loans.

While there is large variation in business loan size among lenders, there are once again slices of the market that service different levels of financing. In general, asset based loans are for commercial financing requirements above $500,000 in order to justify the work that goes into assessing them and the ongoing monitoring that may be required on a monthly basis.

The more an asset based facility is based on working capital cash flow, the more monitoring that will be required and the more control the lender will have with respect to the cash inflows and out flows.

Because there are so many types of asset based lenders that tend to overlap with respect to the deals they will look at, there can be several different types of options and related pricing to consider.

Unless the asset based financing is bank or institutionally based, its likely going to be short term in nature (one to two years) and is being used as a bridge loan to allow the borrower the capital and time to get into a better financing position which will allow refinancing into a lower cost institutional program.

And the right choice is not always the lowest cost. Some programs have very restrictive operating requirements that may not provide you with the flexibility you need to operate properly. Others may require high repayment penalties if you have the opportunity to refinance them before the term is up.

Regardless of the application, you will likely have a list of options to consider that can be hard to locate and harder to secure.

Because asset based loans will typically be one step in a multiple step financing process, you would be well advised to work with a business financing specialist who can help you map out a financing strategy that will work the best with the most relevant asset based loan sources available to you.

Click Here To Speak To Business Financing Specialist Brent Finlay

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