Asset Based Loans

An asset-based loan is a form of business lending that relies on your business’s collateral rather than just cash flow and credit.

With traditional loans, lenders look at cash flow first and collateral second. With asset-based commercial real estate loan programs, lenders look at collateral first and cash flow second. Relying on collateral to provide financing allows rapidly growing businesses to maintain the liquidity needed to keep up with working capital requirements.

It’s also great for companies that have stable growth or are in distress and need to recapitalize their balance sheets. In most cases, shifting existing term debt into a formulaic borrow against an assets-based line of credit will result in improved cash flow and more liquidity for the business.

Here are some of the reasons why many business owners prefer business asset loans:

• Use your business assets for working capital
• Unlock tied-up equity
• Increase your line of credit
• Borrow against your asset-backed loan
• Improve your balance sheet

1. Asset-based line of credit:
Asset-based lines of credit are structured as revolving credit lines that utilize the underlying collateral for additional working capital and improved cash flow. Some collateral used in the financing are highly liquid assets with a fixed value, such as machinery and equipment, while others are constantly churning, such as inventory and accounts receivable.

Having a fixed collateral value on machinery and equipment will give a constant amount of liquidity on the revolving line of credit, while the churn of both inventory and accounts receivable will provide a varying amount of liquidity. When more inventory is purchased, and new sales are made, the collateral value increases, resulting in more capital being available on the revolving credit line.

2. Asset-based term loan:
Asset-backed loans use the same collateral as an asset-based line of credit, but instead of the facility being a revolving credit line, it is structured as a term loan.

The term loan can be amortized over 1 to 5 years with monthly principal and interest payments. By utilizing collateral that has a fixed value, such as real estate, machinery, and equipment, we are able to provide high loan-to-value ratios with low monthly loan payments.

• Increased working capital
• You can pay suppliers on time
• To fund your business expansion
• You can’t qualify for other loans
• You need a quick cash

• Asset-backed lending for small businesses allows you to utilize a variety of collateral options to improve business cash flow. Although there is a long list of collateral options that can be used, there are some that are weighted more heavily than others.

  Accounts Receivable (A/R) – Once services have been rendered and a sale is official, an invoice is created and sent to customers. For a majority of asset loans, the accounts receivable of a business are the primary asset that secures the asset-based line of credit or asset-backed term loan. The LTV or loan-to-value can vary, but average advance rates are 90% of the invoice amount. There are numerous items that affect the advance rate on an invoice. Some of these variables are the time it takes a customer to pay, the payment terms that the product is sold on, the credit strength of each customer, and the concentration or diversification of your customer base.

  Inventory – Inventory is a core asset that can be used when looking to collateralize an asset-based loan to improve cash flow. It’s common that business owners will value inventory at retail, but any asset-based lender will look to understand what they can sell inventory for in the event of a default. The advance rate on inventory ranges depending on a variety of factors. Some of those factors include the location of where inventory is stored, the type of goods, and how easily inventory can be sold if needed. It’s also important for companies to have a perpetual inventory system to monitor inventory levels.

  Purchase Orders – A common asset used in asset-backed finance is purchase orders or POs. When a customer places an order, they issue a PO, which outlines the order. The purchase order will show the order date, when goods are to be shipped, the quantity, price per unit, etc. When a PO is received by a seller, an asset-based lender will review the terms to understand who the customer is, the creditworthiness, and the value of the PO. The loan to value for purchase order financing ranges between thirty to forty percent and as soon as the goods are shipped and an invoice is created, the additional availability will be released.

  Machinery and Equipment – Considered a hard asset, machinery and equipment are favorable assets for assed-based lenders. By taking the make, model, year, and the condition of the equipment a lender will have the ability to assign a value to the equipment. The typical advance rates or LTV assigned to equipment and machinery is 60% of the FLV or forced liquidation value. This means that the lender will provide availability based on what they would be able to sell the equipment for in the event of a default.

  Commercial Real Estate – Although commercial real estate or CRE is a hard asset and a great form of collateral, it’s not as liquid as equipment, A/R, or inventory. In most cases CRE will be used as an additional asset to provide added liquidity on an asset-based facility, rather than the primary asset used to secure the loan. For example, if you were looking to borrow $5,000,000 from an asset-based lender and only had enough A/R and Inventory to get to $4,000,000, an asset-based lender would look toward your commercial real estate as collateral to provide you with the additional $1,000,000 of availability.

  Marketable Securities – Although not a core asset for asset based lending, marketable securities can be used as boot collateral. Securities are often highly liquid and provide lenders with collateral that can easily liquidated. Some examples are bonds. certificates of deposits (CD), or publicly traded stocks. Advance rates range depending on the strength of the security and can be anywhere from 50% to 95% of market value.

  Intellectual Property – IP is another asset that can be used in a borrowing base calculation but is very seldom used as standalone collateral. Since IP is an intangible asset, it’s very difficult to truly assign value to it, which means it can be used to help an asset-based lender provide a marginal increase of liquidity, but will never make up a substantial portion of the collateral base.

There are a variety of different asset based lending for small business, all of which have different structures, credit criteria, and asset based loan rates. Compared to unsecured loans, asset-based loans have much lower rates. In general, asset-based loan rates range from 5.25% to 15%. The financing can be structured as an asset backed line of credit or an asset-based term loan.

Below is a list of factors that can affect your rate.

• Property value based on recent appraisal
• Balance Sheet
• A/R and A/P Aging Report
• Business Tax Returns
• Debt Schedule
• Inventory Report