For companies that have low credit rating or track record to qualify for more traditional types of financing, asset based lending and factoring comes for rescue. It is a type of lending, which is any kind of borrowing secured by an asset of the company.
Asset based lending is a well-known and wise financing option for many small and medium sized businesses.It involves a practical yet creative approach to loan structures and provides borrowers with high financial leverage and marginal cash flows. It mainly uses makes use of assets such as receivables and inventory as collateral for the loan. In this type of lending, the quality of the collateral becomes dominant in determining the creditworthiness of the customer. Since asset based lending uses a client’s business assets as its principal factor for lending, it provides a high borrowing power to the borrower as compared to traditional cash flow banking.
Asset based loans are mainly used for expansion and growth of small businesses and can also be used at the time of mergers and acquisitions, if needed. Another purpose fulfilled by asset based lending is management buy-ins or buy-outs. Turnaround financing, refinancing of existing business loans are also the reasons for which these loans are normally used.
Banks typically are the lenders of conventional line of credit loans. They have very low cost of funds because of their deposit base and they keep low headcounts, relying more on their periodic financial review to control costs and attract investors. Asset based financing is usually offered by specialty, non-bank lenders but now more and more mainstream banks are also offering an Asset based lending product to permit them to serve more borrowers who do not qualify for a conventional bank line of credit.
Pricing, advance percentages and administrative burden vary significantly from lender to lender. Borrowers are best served if they clearly understand their needs and shop thoughtfully and thoroughly for the best fit.
Asset Based financing might be an incredible answer for a pressing business issue. Be that as it may be conceivable to get tied into the wrong item in the event that you don’t take a word of wisdom. You would prefer not to run the danger of being bolted into a 12-month get that is not conveying what you need.