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What is Asset Based Lending & What are its Benefits?

Asset based loans is a type of business where loans are provided on the basis of the collateral security. The asset could be either being fixed or current assets and consider as the most common form of lending method in the world market and sometime also called as secured lending. This type of loan is often provided by the private lender or by other financial institutions.

Asset based financial services play the vital role in funding the economy and dedicated to the growth and well-being of the clients. They provide the borrower with the money in against of the fixed assets and stretch their arms for domestic and commercial banks, big and small companies, factoring organizations, provide financial subsidy to the major industrial sectors.

Most of the private lender is highly experienced and know how to form the proper financing strategy for the borrowers. Most of this financial business involved the wide range of services both for the domestic and international purposes.

Normally they provide Equipment financing, operating cash, Debt consolidation, Bankruptcy/reorganization financing, Turnaround financing, inventory financing, floor plan financing, export/import trade financing, factoring services, Growth financing, Equipment leasing, Growth Money and Funding for an acquisition for the merger or a leveraged buyout.

Why Asset based lending (ABL) be a useful financing alternative?

  • Acquisition – Asset based lending is the excellent way to obtain fund for business acquisitions and helps the business to grow.

  • Turnaround Financing – This type of Financing is often used by under performing business. Most of the time, borrowers use this type of loan at the time of bankruptcy, which is ideal for the turnarounds because of its flexibility.

  • Capital Expenditures – Capital expenditure is the type of spending where the company may incur at the time of purchasing some physical assets by the help of asset based lending.

  • Growth – When a company grows, it asset also grows and help in the ability to borrow. An experienced and creative asset based lender could gather a credit facility that could scale to grow with time.

  • Recapitalization – A company might recapitalize due to insolvency or convert debt securities with equity in order to cut down the company’s ongoing interest responsibility by the help of asset based lending.

  • Restructuring/Refinancing – when any company enters into the growth stage, restructuring or refinancing might be the key to create the capital structure which helps to meet the want of the company. It has been found that this kind of financing is often used for restructuring operations, market expansion and completing an acquisition.

Some different types of Asset Based Financing

Secured lending – The lender of the fund, finance in against of the assets of the borrower. The collateral securities could be the fixed and other kinds of assets whose value should be determined.

This type of lending helps the borrowers to use the fund to buy more materials, expansion of the marketing, and improvement of the productivity and cells of the resultant products. The increasing and decreasing of the loan balance is cyclical, therefore revolving the nature of the loan.

Full-recourse financing – The financial institutions recognize the task of the accepting the credit risk. The client maintains the responsibility for organizing the receivable of the portfolio. Normally, the lender would finance the invoices or the bill up to 90 days from the delivery of the goods or the services, then charge them back to the borrower.

Floor plan financing – Some particular types of industries needed high-priced financial goods inventory. For example: washing machines, televisions, refrigerators, automobiles and stereo systems. Retailers usually don’t purchase the costly inventory directly, rather than a financial company would provide credit to purchase the inventory.

Leasing – The lease giver buys the equipment required to fulfill some responsibility and the equipment remains the property of the lease giver even after all the borrowed funds are repaid, or the existing assets are sold to and leased from a leasing company to release capital needed for working capital purposes.

Purchase order financing – The working capital financing is secured by the security interest in surviving purchase orders and the carry on the purchase orders. Normally, the security interest is formed by the lender taking ownership of the inventory or raw materials.

Most of the time, companies could use the asset based lending to raise their cash flow and capitalize on market possibilities. It is advisable to read more about the asset-based financing to catch the original picture of it.

Read the bank’s or lending company terms and conditions very carefully, consult an experienced person for terms which are not clear to you.

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