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What's an asset-based loan, and how are they awarded?

Asset-based lending involves a company taking a combination of their accounts receivables, assets and inventory and using them as collateral for receiving immediate inflows of cash into their business. Lenders who offer these types of loans advance the funds to a borrower in exchange for gaining access to their secured assets. Most often, they lay claim to 50 percent of finished inventory and 80 percent of receivable values.

Smaller and newer business owners often struggle to find asset-based lenders willing to extend them a line of credit. This has a lot to do with the fact that properly monitoring this type of loan can be both time-consuming and costly. It's because of these concerns that most lenders prefer to offer these loans to larger and more established companies.

Even then, it's likely that a lender is going to want to see proof of paying customers, good reporting and financial statements and demand for your inventory to move forward in working with you.

Companies who are awarded asset-based loans are often able to overcome financial hurdles that might put others out of business. A loan of this type tends to help businesses gain access to the capital necessary to sustain consistent growth.

Businesses working in seasonal industries or ones where the cyclical nature of their business makes it difficult to free up cash flow can benefit from these types of loans. Seasonal income impacts those working in distribution, manufacturing and service industries. These loans are often used as a method of making acquisitions as well.

While there are many benefits to taking out this type of loan, there are just as many downsides to doing so. Your lender will likely cherry pick though your receivable customers and use their ability to repay to help them decide whether to offer you a line of credit or not.

Costs associated with receiving an asset-based loans are generally higher than those associated with other loans or credit lines. Agreeing to this type of loan also entitles a third party, hired by your lender, to have control over your cash flow. This can make for an uncomfortable situation for owners.

If you're considering taking out an asset-based loan and you're unsure whether it's right for you, then a Phoenix commercial real estate transactions attorney can advise you of the pros and cons of doing so.

Source: Entrepreneur Magazine, "The ins and outs of asset-based loans," accessed Feb. 16, 2018

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