First of all, asset based lending is all about providing more lending against the available hard assets of a business. The more predictable the resale value of the assets pledged as security, the larger the amount of financing that can be provided by an asset based lender.
Just like all forms of business financing, there are different levels of asset based lending set up according to credit rating and business performance. At the lowest cost level, banks and institutional lenders have asset based lending divisions that focus on providing greater asset leverage to their higher end clients that have an asset intensive balance sheet and require more leverage than what the bank’s traditional corporate finance division can provide to run their business.
The more traditional form of asset based lender focuses on borrowers that do not quite fit the bank’s asset based lending requirements. Slipping into this realm of asset based loans can push the lending rate from prime plus interest into annual rates of 12% to 18%. The cornerstone of these asset based models is the businesses accounts receivable and the resulting cash flow they create.
Still higher priced asset based lending becomes more focused on individual assets , or groups of assets, such as accounts receivable, or accounts receivable and inventory, or inventory only, or equipment, or real estate, and so on.
Sometimes companies with significant assets in all major categories (accounts receivable, inventory, equipment, and real estate) will work with a combination of different asset based lenders to get the best overall leverage and repayment terms.
The challenge with all of this is to locate the most suitable asset based lenders that are relevant to your situation, assets, and needs at a given point of time. In certain cases, the variability among lenders providing asset based loans on certain types of assets can be considerable resulting in borrowers paying higher costs of financing than they need to.
But when time and money are short, its easy to take the first thing that’s available in order to keep the business going and then hope that there is going to continue to be sufficient margin available from sales to pay the higher interest costs and to get the business to a position of profitability that will allow it to return to a cheaper form of debt financing.
The best way to determine what you’re preferred options are at a given point of time is to work with a business financing specialist who understands the current market and lender underwriting.