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Asset based lending is a business loan secured by
collateral (assets). The asset based loan, or line of credit, is
secured by a combination of assets including accounts receivable,
inventory, machinery and equipment, and sometimes real estate and/or other balance-sheet
assets. This form of financing is also known as "commercial finance" or "asset-based
financing". |
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Depending on the structure needed, an asset based line can
involve only accounts receivable, or accounts receivable and one
other asset. Asset-based lending is a true equivalent of a lending
line provided by a bank. Asset-based lending is traditionally funded
by a non-bank lender, and is not regulated by the FDIC and therefore
is simpler to apply and qualify for because it is not subject to the
restrictive and tight lending requirements of the banking industry.
As a business becomes larger and expands, the need for additional
cash flow is very important. This additional cash flow cannot be
provided from accounts receivable alone, but from the other assets
such as inventory and equipment. An asset based credit facility can
grow very rapidly as individual assets grow.
Components
Asset based facility lines usually consist of a revolving line and a
term loan. The revolving line is usually secured by eligible
accounts receivable and eligible inventories. The term loan is
usually secured by equipment, machinery, transportation vehicles,
leasehold improvements, and sometimes land and buildings.
Pricing
- Revolving Lines - Prime to Prime + 1.0% to 6.0%
- Term Loans - Prime to Prime + 1.0% to 6.0%
Advance Rates (This is the funds advanced against the values of
the asset)
Revolving Line
- Accounts Receivable 80-85%
- Inventory 50-70% (Advance is typically based on orderly
liquidation value of asset)
Term Loan
- Machinery and Equipment 50-70% (Advance is typically based on
orderly liquidation value of asset)
- Real Estate 40-50% (Advance rate is based on Fair Market
Value)
Advance rates may vary depending on specific industries, A/R
dilution, and the after market value of each secured asset.
Due diligence typically involves the verification and appraisal of
assets offered, an accounting review of the company and its
operations to give an opinion as to the ability to service the debt
and obtaining a legal opinion as to the ability to place a 1st lien
against the collateral being offered and to determine if there are
any other factors or circumstances that would affect or impede the
ability to protect the lender’s interests in the event that the
company was to default on the debt.
The lender's do not review the transaction as a conventional lender
would but rather does their review on the basis of securing a 1st
lien on sufficient collateral to provide the requested loan amount
and making certain that the cash flows of the company will be
sufficient to cover the debt service on the loan.
Typically, time to funding for these transactions run between 30 to
60 days depending upon the complexity of the transaction, type of
assets being offered and scheduling of appraisals, legal and
accounting evaluations. |
