When making a commercial real estate acquisition, starting a new business or exploring a business growth opportunity, funding those ventures may be an understandable concern. It is important to understand funding options and one possible source of funding is asset-based lending. In the most basic sense, asset-based loans are based on assets which serve as collateral for the loan. Assets typically include accounts receivable and inventory.
Asset-based lending provides for access to funding based on future revenue. Asset-based loans include funds that are advanced based on a percentage of the value of the secured assets that is agreed upon by the parties. This number is typically 70 to 80 percent of receivables that are eligible to be counted and 50 percent of the finished inventory. Asset-based lending can be helpful for manufacturers, distributors and services companies, as well as parties making financial acquisitions such as in the commercial real estate industry. Companies that are going through a period of rapid growth, going through a turnaround process, or are undercapitalized may benefit from asset-based lending.
There are a number of banks and finance companies that offer asset-based lending. Small businesses may need to be prepared to do a little more research because asset-based lenders typically prefer to make larger loans because of the monitoring costs and may prefer older companies. Asset-based loans can be more likely obtained when the company has good financial statements; good reporting processes; commonly sold inventory; and customers who have a strong history of paying the bills that are due. To obtain an asset-based loan, the applicant should provide accurate and thorough financial records.
There may be some challenges associated with asset-based lending and the process can be complicated so it can help to have knowledge of the process. Proper guidance through the process can also be useful when deciding what lending option is best for a particular commercial real estate acquisition or business venture.
Source: Entrepreneur, “The Ins and Outs of Asset-Based Loans,” Accessed May 23, 2016