Types of Asset-Based Loans
First, a comment on loan structure.
Asset-based borrowing can be structured as a revolving line of credit or a term loan (or a combination.)
Revolving line of credit – You’re able to borrow based on acceptable collateral at each line of credit draw. You can borrow as much as the lender will lend based on the collateral or you can borrow little or none. This is perfect for volatile, temporary or seasonal liquidity needs or as “liquidity insurance.”
Term Loan – You borrow a fixed amount for a fixed period of time. Asset-based term loans are typically structured for longer-life assets such as machinery and equipment.
Lenders will often agree to a term loan secured by M&E and a line of credit secured by accounts receivable and inventory.
Now let’s take a closer look at the types of collateral used to secure asset-based loans.
- Accounts Receivable: Sell or pledge your accounts receivables and use your customers’ credit to generate liquidity. Smaller deals generally require a true sale while larger deals can be structured as a collateralized line of credit.
- Purchase Orders: Purchase order financing provides financing early in the fulfillment cycle. With purchase order finance, you borrow money secured by the your customer’s purchase order. A PO finance company steps in and pays your suppliers. This is another way to borrow using your customers’ credit.
- Inventory: Many lines of credit are secured by accounts receivable and inventory. Raw materials and finished goods are generally accepted as eligible inventory collateral, usually at a discount to the book value. Revolving lines of credit can be structured to allow funding for seasonal increases in inventory.
- Machinery and Equipment: Almost all new and used equipment can be financed either as an equipment financing or an equipment lease. Soft costs can be wrapped into the lease. Start-ups can qualify for equipment finance.
- Commercial Real Estate: A company’s commercial real estate is usually financed separately from an asset-based credit facility but some lenders will include this asset class in their facility, either as bootstrap collateral for a line of credit or as a term loan.
- Intellectual Property: Many companies have invested heavily in product or service development and have a substantial IP asset on their balance sheets. IP can be added to a collateral pool in cases where the IP is commercialized and can be independently valued.
- Contracts: Contracts that represent monthly recurring revenue (e.g., for SaaS-based companies) can be used as collateral for a line of credit or term loan.
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