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Why Are Asset Based Lenders Replacing Banks

Published 9/25/2012

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Asset-based lenders are growing in popularity as they compete with commercial banks. Many companies today prefer obtaining financial loans from asset-based lenders to going through the stringent process involved with using the traditional methods.

Getting an approval for loans from commercial banks requires borrowers to convincingly show their ability to pay off the loan. Business owners who can pass through this step will certainly be allowed to borrow money to expand or cover their losses during off-peak seasons. In addition, banks provide credit lines to qualified borrowers. This gives them the most viable way to secure funds when they need them. More information about Asset Based Lending


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Although many businesses continue to enjoy the benefits of obtaining funds using traditional methods, others have found a new way to address their financing problems. This is through asset-based lending. The best thing about this new approach is that it comes with lower costs compared to bank loans and credit lines.

A Closer Look at Asset-Based Lending

The basic concept utilized in asset-based lending is that the borrower pledges some sort of assets to the lender in exchange for funding. The assets can be in the form of commercial accounts receivable, purchase orders, inventory or a combination of these. Generally, the borrower receives the funds using a sort of credit line that is equal to the amount of assets collateralized. In other words, the lender buys these assets and expects that the sales proceeds will be enough to cover the amount provided to the borrower. However, each lender has different rules.

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Asset-based Lending Applications

Asset-based lending can be used in many different ways. The requirements and terms may vary depending on the loan's purpose and the agreement between the lender and the borrower.

Working Capital

All businesses need working capital in order to bridge financial gaps. Asset-based lenders offer funds for working capital using a variety of assets as collateral.

Turnaround Financing

Asset-based loans are ideal for turnaround financing because of their flexibility. Turnaround financing is great for businesses that are on their way to insolvency or not achieving their full potential. Asset-based lending is a good choice for these businesses as lenders are actually used to the bankruptcy process.

Acquisition

Asset-based financing is a good way to obtain funds for business acquisition. With this, a business can easily grow and expand by acquiring a strategic partner or even rival companies.

Business Growth

As a business grows, the need for funding often increases. These funds are needed to acquire more assets. This means the company's collateral also grows. Asset lenders have the resources and knowledge to come up with a credit plan that can scale to grow with the business.

Capital Expenditures

Asset-based loans can also be used for capital expenditures. This means businesses can upgrade their physical assets and buy more equipment, machinery or buildings.

Asset-based Lending Monitoring

Asset-based lenders have varying levels of control and client monitoring. They typically base it on the borrower's credit-worthiness.

Ongoing Audits

The asset-based lender conducts periodic audits of client books and records. They make sure that the collateral values that borrowers present are accurate and valid.

Collateral Reporting

Lenders make sure that borrowers submit collateral reports. This can be done on a daily, weekly or monthly basis. This includes the inventory listings, sales invoices and accounts receivable.

Collection Controls

Asset-based lenders usually require control over the cash by creating an account where accounts receivable are directly deposited. This is applicable for borrowers that utilize accounts receivable as their collateral. Only asset-based lenders have the access to these accounts.

Borrowing Base Formula

Asset-based lenders make use of a borrowing base formula that will monitor the relationship between the actual loan balance and the collateral value to secure the existing loan. This monitoring is done on a regular basis.

Advantages of Asset-Based Lending

Provides solutions to a fast-growing company's cash flow problems.

The lack of funds hinders small businesses who have all the potentials to grow. This is because they may need to turn down new customers and more orders as they cannot keep up with them. They need funds to fill up the orders, gain profit and reinvest them for the business expansion. Unfortunately, they cannot quickly obtain funds or get approved for a loan application if they opt for traditional financing institutions like banks. Asset-based lenders are the best solution. They provide quick funds without the tedious loan application process.

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Asset Based Financing Rates

Prime +2% & Admin Fee

  • Quick Approval Process!
  • Borrow on Inventory Assets
  • Over 15 years in business
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Offers low interest rates

Asset-based lenders offer low interest rates compared to unsecured loans. The lenders money is not at high risk because they hold collateral assets. They may forfeit these assets for non-repayment.

Gives importance to asset value

With asset-based lenders, borrowers can ensure that their assets are given more relevance than their cash flow status and their credit history. Lenders offer excellent value for good assets. Clients who use inventory as their collateral may get loans up to 80 percent of the total inventory value. Meanwhile, businesses that use their accounts receivable as collateral will have 75 to 90 percent credited to their collateral base. Higher rates are credited to newer receivables.

Asset-based lending is also the best choice for businesses that do not have outstanding credit. They can apply for loans with any assets they have. This may be accounts receivable, equipment, inventory and other intangible items such as intellectual property or patents.

Provides flexible payment plans

Most asset-based lenders offer flexible repayment terms. Borrowers are able to pay their loans a lot faster if they use their inventory and accounts receivable as their collateral.

Asset-Based Lending versus Banks

Traditional bank loans are typically based on the borrower's cash flow. On the other hand, asset-based lending focuses on other factors aside from cash flow. Banks favor cash-flow based lending because it is based on the company's actual revenue. There are many differences between asset-based lenders and banks. Understanding these differences will give a clear answer as to why asset-based lending is becoming such a popular option.

Collateral Requirements

Banks require loan borrowers to submit proof that they are capable of paying the loans. Borrowers need to present a good credit rating. Banks use the company's expected income as their basis of approval in addition to the credit rating. With this, a lot of businesses are unable to satisfy the requirements. As a result, they go for asset-based financing instead.

Asset-based lenders look through the different types of assets available for collateral. They consider assets like equipment, inventory and accounts receivable. These assets are not accepted or considered when applying for cash-flow based loans like those offered at banks. Asset-based lenders use these assets as security against the borrower defaulting. Lenders can assume ownership of the asset collateralized in cases when borrowers are unable to pay their loans.

Emphasis

Banks focus on a company's cash flow when making loans. They use it as the determining factor in approving loans and amounts. This requirement is quite difficult for start-up businesses or those that have not yet maximized their full potential. An asset-based lender's main focus is on the asset itself. As long as businesses have assets for collateral, they can certainly apply for a loan.

Suitability

Both asset-based lending and bank loans are not suitable for all types of businesses. Basically, bank loans are designed for companies with high credit ratings and large amounts of documented cash flow. Similarly, asset-based lending is great for businesses with poor credit ratings and lower cash flow. This simply means bank loans are not a good choice for smaller businesses and struggling ones. However, the best thing about asset-based lending is that the funds can be used for a variety of applications. Borrowers can obtain funds for working capital, business acquisition, expansion, capital expenditures and recapitalization. No matter what the status of a business is, they may be qualified for an asset-based loan.

The Bottom Line

There are actually pros and cons that come with asset-based lending and obtaining loans from banks. For some businesses, bank loans may provide the biggest advantage. This can be because the company is doing well and the bank believes they are not high-risk borrowers. Smaller businesses may find it hard to get bank loan approval. They often seek help from asset-based lenders. With their existing assets, they can get funds to fill in any financing gaps that the business is facing. With this, small businesses can expand and gain profit. They can get funds quickly without having to present their business plans, cash flow and credit rating.

The truth is that asset-based loans are usually a last resort for most businesses. They can be a great alternative for borrowers who cannot satisfy bank loans. It is the quickest and the most convenient way available. However, the fees and interest rate charges are actually higher than those offered at banks.

Asset-based lending can be a great option. So can bank loans. The most important thing is that borrowers handle their finances responsibly

Request a Call back

24/7

Asset Based Financing Rates

Prime +2% & Admin Fee

  • Quick Approval Process!
  • Borrow on Inventory Assets
  • Over 15 years in business
Request a Quote Online
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