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An asset-based loan or secured loan is a 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
– large and small alike – 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, both domestically
and internationally.
Acceptable Collateral Types
Asset-based lenders are collateral lenders, as
opposed to cash flow lenders. 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:
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Working capital facilities based on accounts
receivable and/or inventory: Loans which finance accounts
receivable and inventory are typically structured under a
revolving line of credit or "revolver," without a scheduled
repayment. The lender advances funds against the revolver to carry
accounts receivable and inventory and, when such assets convert to
cash, the advances are repaid accordingly.
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Fixed asset facilities to finance equipment and
owner-occupied real estate: Loans financing equipment and real
estate typically take the form of term facilities with a scheduled
repayment usually equal to the fixed assets' useful life. Some
asset-based lenders will not take on term debt or limit their
exposure to it, since such debt carries a higher degree of risk
than revolving debt. Equipment finance companies, leasing
companies, and mortgage bankers specialize in fixed asset
financing and provide such financing on a transactional basis.
When do asset based loans make sense?
Good candidates for an asset-based loan 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.
Acceptable Uses of Funds
Asset based loans provide capital for a wide variety of financial
requirements including:
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Leveraged mergers and acquisitions
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Turnaround/restructuring situations
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Liquidity events for family-held businesses
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Growth opportunities
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Capital expenditures
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Tight working capital
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Seasonal or cyclical companies
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Specialized industries
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Stock repurchase
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Public ownership to private ownership
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Debtor-in-possession (DIP)/confirmation financing
Asset-Based Lending vs. Traditional Bank Financing
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.
How does the asset-based lender monitor its 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:
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A borrowing base formula that monitors the
relationship between the value of the collateral available to
secure the outstanding loan and the actual balance of the loan on
a regular basis.
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Funding controls (collateral monitoring) that may
be administered daily, weekly, or monthly and range from
submission of sales invoices/shipping documents to accounts
receivable aging and listings/inventory listings. The degree of
reporting depends on the borrower's risk rating.
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Collection controls: The asset-based lender
requires dominion (control) over cash by establishing a collateral
account into which accounts receivable collections are deposited.
Access to this account is restricted to the asset-based lender.
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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.
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