Does Your Company Need an Asset-based Loan?

Businessman pressing a Business Loan concept buttonBusinesses apply for loans to fulfill various cash flow needs of their operations, such as meeting payroll or funding a short-term investment. If a business cannot show it can repay the loan, a lender may choose to provide the loan based on the value of the business’ assets. This is called asset-based lending.

How asset-based lending works

TAB Bank in Utah described asset-based lending as a flexible alternative to traditional lending. The lending terms depend on the value and type of the secured asset. Is it liquid enough that it can readily be disposed of or turned into cash? Often, lenders would prefer highly liquid assets, such as bonds, mutual funds, and properties. They want to guarantee the security of their loan so having an easily convertible security is the best collateral. Additionally, if the asset is more liquid, the loan-to-value ratio is higher.

The value of an asset-based loan is never equal to the full value of the pledged assets. Normally, the lender and the business will agree upon a certain percentage of the assets’ value. This may go between 70 and 80 percent of the value of receivables or 50 percent of inventory.

Why businesses apply for asset-based loans

So, do you need an asset-based loan? Businesses apply for asset-based loans for several reasons. They may use these to raise capital. For big companies, when they issue shares or bonds in the capital market, they need to raise capital to offset the huge costs of investment. Also, asset-based lending is reliable for immediate funding, particularly with time-constrained projects like mergers or acquisitions. For smaller companies, however, asset-based lending is a common solution for immediate cash flow needs, from payroll to inventory requirements.

Asset-based loans are perfect for companies that are growing fast, as well as those with high leverage and those that are undercapitalized. These businesses are usually engaged in the manufacturing, distribution, and service sectors. If your business is any of these, then asset-based lending can be the right choice.

Posted on by Ann Klatt in Money Talks

About Ann Klatt

Ann's love for discovering new things has led her to different parts of the world. Though she is now based in Miami and works as interior designer, she still finds time to travel and experience new culture.

Comments are closed.