Asset Based Loans

A company or business may sometimes need a loan, but they don't want to get a typical loan from a bank. An asset based loan can be the thing to use as long as you keep good inventory and accounts receivable records, and you have a business or product that makes sense. A product or service that sells well may be used as collateral for a loan through an asset based loan financial institution.


1. What is an Asset Based loan?

Asset based loans are loans that are given not only from banks, but also from a commercial finance company. They are offered on a revolving basis and use the company's assets as collateral. Accounts receivable and inventory are two of the most often used accounts for collateral. Other assets such as real estate, buildings, and machine equipment may help as collateral for a loan. Many companies consider getting an asset based loan when they have excellent assets as collateral, as they can turn their assets into capital.

A company may have such a rapid growth of success that they are unable to finance their ongoing cash needs from within. Asset based financing will only work if the company can prove that they have accounts receivable, and a steady source of income from profits of their business. They must usually also be able to demonstrate that they have had a great track record of turning their inventory over several times a year. Simply put, the company may be doing quite well, but still need a loan to keep going at their current rate of profit.

Although you will still own your assets, the bank may seize them if you do not keep up your end of the loan. An asset based loan is perfect for many small businesses who need a bit more money to continue to grow, but who are still doing well in their business.

2. Who needs an Asset Based Loan?

A company that is growing very rapidly is a good candidate for an asset based loan. Additionally, companies and businesses that are in the middle of a turnaround or are undercapitalized may be eligible as well. Remember, to qualify and receive a loan, you must be able to show that you can, and have been, turning your inventory over several times a year.

It can be easy to get an asset based loan. If your business keeps a good record of financial statements and reports, and a neat list of inventory, a loan may be easy to obtain. A company or bank will also look at the customers of a company to see if they are typically paying their bills on time and for the correct amount. These factors will be very important in getting an asset based loan for your business.

Getting a loan can be challenging, even when you are trying for an asset based kind. Making sure your business fits the qualifications listed above will help you in your quest for a great loan. Many people can benefit from using an asset based loan, so it is worth looking into when you are strapped for cash, or cannot keep up with the growing needs of your business.

3. What are the requirements to obtain a loan?

A company that desires to obtain an asset based loan should know the requirements needed before going to the bank or lending company. Before they try to get a loan, they should gather all their data and records, making sure they are current and accurate. When they talk to the lender, they need to have their entire financial information ready, and be able to show their situation in a positive way. Details should be accurate and specific so they can answer questions easily. A borrower should also be able to make the lender as comfortable as possible with their person and their company. After all, everyone wants to be happy, personally, with the company and people they are doing business with. Getting an asset based loan should be no exception.

There are a few requirements to getting an asset based loan. First, the business should already have a decent net worth. They should have long-term viability, and be able to submit a year's worth of monthly projections for profit. It is wise to have a certified public accountant review the company's financial statements first before going into the meeting with the lender. The business should make sure that their principal can guarantee the loan, which should be proved by their financial statements. Life insurance, called keyman or keywoman insurance, may also be required to get an asset based loan. Going into a meeting with a lender well prepared is one of the best ways to ensure that your company does get the loan.

4. Who can benefit from Asset Based Loan?

Many companies can benefit from taking out an asset based loan. There are also various situations that a company may fall into that an asset based loan is the better solution for their problems. If your company is growing much more rapidly than you expected, you may have difficulty in financing it, thus giving need for a loan. Another reason is if your business' sales increase or decrease depending on the seasonal changes.

A great reason to get a loan is if your company is in a situation where you could get a better deal on goods and supplies if you could buy in bulk. A loan could help accomplish this. If you are interested in an acquisition, yet do not have the money to finance it, an asset based loan may be the thing for you.

Another reason your company may be interested in an asset based loan, is if they are interested in financing an ESOP. An ESOP is an Employee Stock Ownership Plan, a tax-qualified, contribution employee benefit plan. This plan is similar to profit sharing, but instead designed to invest in employer stock instead of the stock of other companies. It can also provide great tax benefits to your company, while benefiting its employees as well. A company wanting to start an ESOP may need the extra funding to do so, and an asset based loan may be just the thing to apply for.

5. Is it Easy to get an Asset Based Loan?

Some companies will have an easier time than others receiving an asset based loan. Asset based loans may also be called "equity based" lending, and could be easier for borrowers to obtain when they do not conform to most lending requirements. Asset based loans can be given to a company with no little or no credit. They may also be given to those who have bad credit, as well. A company may actually have little income to fully support the loan, so they will rely on the loan itself to pay the lender back.

Borrowers may also have either little or no down payment on a large commercial purchase transaction because they are buying under value. A down payment may have been required otherwise. A company may have also made a deal with the seller to lend them any remaining balance of the purchasing price, one that may have not been covered by the first position mortgage.

Deciding on a loan is a big decision, and should be researched carefully. There are many circumstances where an asset based loan may be right for you and your company. Doing the proper research can get you the best deals possible when in need of a loan. Also, doing thorough research on the company offering the loan is recommended.

6. Steps of a typical Asset Based Loan

Getting an asset based loan can be accomplished in a few steps. First, the process will start off with the company selling their product or their services to their customers. A receivable is created by the sale, unless it was a cash business transaction, or one where the customer has paid for all their items using their credit card. After the receivable is created, which is in essence a debt to the company, it will be repaid in a matter of 10, 15, 30, or 45 days. This asset, along with inventory of the company, will start the process of getting an asset based loan.

Then, the company goes to a lender to try and get a loan. If approved, the lender will make a loan to the company that is based on the value of the receivables. When this is completed, the lender does not advance 100 percent of the receivables, but rather 90 percent of whatever receivables are eligible. When those funds are advanced, the company immediately starts to pay interest on them. The lender starts to earn that interest. The lender will remit invoices paid to the company, less whatever principal on the loans that have advanced, and less any applicable interest. This is, in essence, how an asset based loan works for most companies.

7. Disadvantages of getting an Asset Based Loan

There are some finer points to remember when deciding if an asset based loan is right for you. First, know that in most cases the customers do not send in their payments to the actual company that is selling them the product, item, or service. Instead, they are sending payments into the finance company holding the loan. Some companies do not like to use an asset based loan company simply because a third-party is in control of the money going through the company. If you are not comfortable with this fact, an asset based loan may not be right for you and your company.

In some cases, this uncertainty can be a cause for concern. If a company has a balance that is always large and revolving, and an entire group of customers experiences some type of financial problem, the lender might take out a reserve against possible loan losses. This means that the lender will take money from the company's customer payments as their reserve, instead of sending them into the company. In this scenario, a company may not have the funds they are previously used to receiving, causing more financial burden.

8. Facts about Asset Based Loans

There are many places that will give companies an asset based loan; the supply of these banks and commercial finance companies is large, and they have very large amounts of capital that they are able to then lend out to businesses. The market, however, for asset based loans that are $500,000 or less is smaller than those that are looking for more money. Many lenders would rather make larger loans because it costs about the same to monitor a loan whether it is small or large.

The companies that will benefit the most from receiving an asset based loan are manufacturers, distributors, and service companies that have a leveraged balance sheet. That sheet must show that the seasonal needs and industry problems may sometimes slow their cash flow. You can also use an asset based loan to finance an acquisition.

Asset based lending also uses other assets as collateral form the companies with whom they are doing business. These may include machinery and equipment, as well as real estate, to include both land and buildings.

9. Terms and Costs of an Asset Based Loan

Most loan companies give a time length for an asset based loan anywhere from six months to three years. However, it is hard to give an exact rate without first evaluating the company's risk level, assets used, and loan amount.

The rate of funds available can be anywhere from $250,000 to $1 million from smaller finance companies and financial institutions. If you need an amount in excess of one million, you will need to find a company that specializes in financing larger amounts such as that.

Small asset loans can cost between 12 percent and 28 percent. The amount will depend on how much is borrowed and the specific company it is borrowed through. It may also depend on other factors, such as how long the loan is taken out for. Many factors go into the decision of percentages owed on the loan, so be sure to get everything in writing when you apply for one.
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