Asset Based Lending for Beginners
Effectively managing cash flow and having funds available are required to facilitate growth. However, that growth can drain available funds as increased sales tie up money in higher receivables. Cash is also invested in additional inventory or utilized to grow staffing.
Here are a few reasons why Asset based lending has become an increasingly popular solution to the growing pains of a rising business.
What is Asset Based Lending?
Asset based lending gives you access to funds in the form of a loan or a line of credit secured by your assets. As a secured loan, asset based lending is easier to secure than traditional bank financing. Assets used as collateral may be property, inventory, or receivables. Although, account receivables are more commonly used as security than other assets because their value is easier to measure.
The values of both inventory and property as collateral are hampered by risk of illiquidity. Accounts receivable invoices are easily measured by invoice value for your creditworthy commercial customers. This asset type provides a larger percentage of value available to you as a line. Asset based loans based on accounts receivable may go as high as 80 to 85 percent of invoice value. By contrast, inventory may provide as low as 50 percent of its value available to you as a line.
Asset Based Lending Advantages
– Provides a quick fix for cash flow
– Is easier to get than conventional financing
– Can be less expensive than factoring or other solutions
Asset Based Lending Disadvantages
Larger lines have more stringent requirements, including audits
Payment is made by customers to a lockbox
Invoices may be verified, adding administrative overhead
How does Asset Based Lending work?
Asset-based lending transactions usually take the form of a revolving line of credit. The amount for which your company will be eligible is based on the value and type of asset that secures the loan. Accounts receivable is the most commonly used asset to secure an asset based loan.
The selected assets become the base for the loan and the financing request is sent to the lender. Upon approval, funds are sent to your business bank account. The asset-based loan transactions settle when the assets converted to cash. In the case of accounts receivable, this is when the customers make their invoice payment to the lockbox or remit payment electronically to a special account.
What are the fees for Asset Based Lending?
If the underlying assets are receivables, which are most commonly used, there are usually two fees. The discount fee is based on the gross value of the invoice batch you submitted for financing. This is a one-time fee. The service fee works more like interest on a standard loan. A percentage of the funds you’ve utilized from your line is charged monthly, but calculated on a daily basis.
Some lenders may also charge audit fees, management fees, or other miscellaneous fees. The largest fee expense will be from the discount fee and the service fee.
Asset based Lending can provide a quick cash infusion when needed, and smooth the business cash flow highs and lows on an ongoing basis. For companies that have assets, particularly those with receivables from creditworthy commercial customers, asset based lending has become an effective way to manage cash flow and continue to grow their businesses.