About asset based loans
Introduction
An asset based loan is a short term loan that is secured using a single asset category or a combination of assets that belong to the borrowing company. These assets could include real estates, inventory, equipments and accounts receivables. Asset based loans are mainly from the commercial finance companies as opposed to the banks. Asset based loans are offered on revolving basis and collateralized by the borrowing companies assets. Asset based loans are recommended for companies that are; growing rapidly, under-capitalized, highly leveraged or those that are in the midst of a turn around. This type of loan works well for the companies that possess good and proven accounts receivables and exhibit a record of inventory turn over several times each year.
Functions and benefits of asset based loans
Functions
Asset based loans provide capital for short term restructuring of a company's financial state so as to maximize the cash flow. It provides a reasonable recovery time and a conducive financial operating environment where it displays how it could perform if awarded a long term loan hence exhibiting its worth to receive a long term loan.
Asset based loans are used to finance rapid and well planned growth in absence of adequate capital to fund the inventory and receivables. Asset based loans are also used to finance acquisitions.
Benefits
- Companies are free to borrow money daily and repay it when they attain enough cash to do so. it does not have a set time frame like other bank loans.
- Asset based loans tend to be more flexible and contain few covenants as compared to other types of loans.The availability of the asset based loans increases as the working capital required to run the company increases.
- The price of asset based loans varies according to the interested company's creditworthiness but it tends to be cheaper than the corporate and bank loans.
Features of asset based loans
- Revolving credit limit: this revolving credit limits changes depending on the actual accounts receivables balances that a company posses on an ongoing basis. Therefore, the lender has to evaluate a company's accounts receivables size through proper monitoring and auditing.
- Cost: asset based loans are more expensive than bank loans. Small asset based loans are more pricey than big asset based loans.
- Ease of acquisition: it is relatively easy to acquire an asset based loan. All an interested company needs to prove is a good financial statement, a good reporting system, a good credit report and a non exotic inventory.
- Has no constrained time frame: companies are free to borrow money daily and repay when they have enough money to repay.
- Asset based loans offer financing against a pool of assets like receivables, leases, loans and other financial assets.
- Asset based loans offer funding against a range of corporate assets and cash flows.
Comments
Asset based loans are a good and reliable way to raise money especially for manufacturers, distributors and service companies whose seasonal needs and industry cycles hinder maximum cash flow. However, there are a few requirements for qualifying for an asset based loan. They include;
- The interested company must possess a reasonable net worth and long term viability.
- The financial statements of the interested company must be reviewed by a qualified accountant recommended by the lending company.
- The main business principals must guarantee the loan and produce their personal financial statements.
- The interested company must present a year's monthly projections.
