What Are Asset-Based Loans?

Asset-based loans are generally offered by finance companies. They are provided on a revolving credit basis and secured against the assets of a company. Usually, accounts receivable and inventory are taken as collateral.

These types of loans are perfect for companies that are expanding rapidly or are undercapitalized. They can also be utilized for financing acquisitions. They work only in those cases where the company has a record of being able to turn over its inventory a number of times in a year and where the accounts receivable is proven.

Asset-based finance is offered by a huge number of funding companies as well as banks. However, the market is not so wide for small businesses who are looking for loans of $500,000 or lower. The majority of lenders prefer sanctioning loans of higher value as the cost of monitoring the loaned amount is the same, regardless of its value.

Asset-based funding is more expensive as compared to bank loans since asset-based lenders incur a higher expenditure than bankers. However, the pricing among lenders is fairly competitive. For a small business, asset-based borrowing may prove to be unaffordable as the rate of interest could be anything between 12 and 28 per cent.

It is simple to get an asset-based loan if your company has a good financial record, effective reporting systems, stable inventory and customers who are known to honor their commitments. Without these factors in place, it may be difficult trying to get this kind of finance.

Asset-based financing is however not restricted to just finance companies. Even suppliers can be considered a source of funds. If your sales cycle is longer than your accounts payable cycle, you may think of asking your suppliers to extend their payment terms. The other option is to simply pay your suppliers after 90 days. In many cases you will find you get three months of funding in this manner without actually paying any interest. You will be able to gauge if your strategy is effective if your suppliers do not stop shipments to you once your first invoice is older than 2 months. Another way you can make payments to your suppliers and get credit is to pay your suppliers after 35 days for a few months. If you see that your suppliers are not objecting, try stretching this to 44 days.

There is a high likelihood of this working since most accounts receivable collection systems point out those payments that have been pending for more than 45 days.