Unlike traditional loans that primarily rely on creditworthiness, asset-based lending is based on the value of the company’s assets, such as accounts receivable, inventory, equipment, and real estate.<\/span><\/p>\nWhat is asset-based lending?<\/h3>\n
Here are the key components and points about asset-based lending:<\/span><\/p>\n\n- Collateral-centred<\/b>: Asset-based lending centres on the value of a company’s assets. Lenders evaluate their quality, liquidity, and marketability to determine the funding amount.<\/span><\/li>\n
- Types of collateral<\/b>:<\/span>\n
\n- Accounts receivable<\/b>: Unpaid invoices from customers are considered a common form of collateral. Lenders may advance a percentage of the total receivables’ value.<\/span><\/li>\n
- Inventory<\/b>: Both finished goods and raw materials can be used as collateral. The lending amount is typically based on the inventory’s current market value.<\/span><\/li>\n
- Equipment and machinery<\/b>: Tangible assets like machinery and equipment can be leveraged for financing.<\/span><\/li>\n
- Real estate<\/b>: Owned properties can be used as collateral, although this is more common in larger, long-term arrangements.<\/span><\/li>\n<\/ul>\n<\/li>\n
- Revolving line of credit<\/b>: A common structure in asset-based lending is a revolving line of credit. This allows the borrower to take out funds up to a specified limit, repay, and use again, much like a business credit card.<\/span><\/li>\n
- Interest rates and terms<\/b>: Interest rates for asset-based lending tend to be higher than traditional loans, reflecting the risk involved.\u00a0<\/span><\/li>\n
- Flexibility and availability<\/b>: Asset-based lending can be more flexible than other forms of financing. It is often used by companies facing rapid growth, seasonal fluctuations, or financial challenges.<\/span><\/li>\n
- Risk and benefits<\/b>: Asset-based lending offers financing but carries the risk of asset loss if the borrower defaults. So, companies should weigh benefits against risks before opting for asset-based lending.<\/span><\/li>\n<\/ol>\n
Overall, asset-based lending can be a valuable financing option for companies with substantial tangible assets, providing them with the working capital needed to grow and thrive in their respective industries.<\/span><\/p>\nExample of asset-based lending<\/h3>\n
XYZ Manufacturing is a mid-sized company specialising in producing custom machinery. It has a diverse range of assets, including accounts receivable and inventory.<\/span><\/p>\nThe company needs additional capital to fund a new product line and improve working capital.<\/p>\n
\n- Asset Evaluation:<\/strong>\n
\n- The company’s assets, particularly accounts receivable and inventory, are evaluated. Let’s say XYZ has $500,000 in accounts receivable and $700,000 in inventory.<\/li>\n<\/ul>\n<\/li>\n
- Asset-based lending agreement:<\/strong>\n
\n- XYZ enters into an asset-based lending agreement with a financial institution. The lender agrees to provide a revolving line of credit based on a percentage of the assessed value of the company’s accounts receivable and inventory.<\/li>\n<\/ul>\n<\/li>\n
- Loan amount calculation:<\/strong>\n
\n- The lender may offer, for example, 80% of the value of accounts receivable and 50% of the value of inventory. The maximum loan amount would be calculated as follows:
\nLoan amount = $400,000 + $350,000 = $750,000<\/span><\/span><\/span><\/li>\n<\/ul>\n<\/li>\n- Repayment:<\/strong>\n
\n- The loan is a revolving line of credit, and as XYZ receives payments from customers or sells inventory, it can repay the borrowed amount. Interest is charged only on the outstanding balance.<\/li>\n<\/ul>\n<\/li>\n<\/ol>\n","protected":false},"author":1,"template":"","class_list":["post-31555","business-glossary","type-business-glossary","status-publish","hentry"],"acf":[],"featured_image_urls_v2":{"full":"","thumbnail":"","medium":"","medium_large":"","large":"","1536x1536":"","2048x2048":"","image_blog":"","image_blog_full":"","image_podcast":"","image_banking":"","image_blog_internal":"","image_blog_medium":"","image_single_banking":""},"post_excerpt_stackable_v2":"
Definition Asset-based lending is a form of business financing where a company secures a loan or line of credit using its assets as collateral. Unlike traditional loans that primarily rely on creditworthiness, asset-based lending is based on the value of the company’s assets, such as accounts receivable, inventory, equipment, and real estate. What is asset-based lending? Here are the key components and points about asset-based lending: Collateral-centred: Asset-based lending centres on the value of a company’s assets. Lenders evaluate their quality, liquidity, and marketability to determine the funding amount. Types of collateral: Accounts receivable: Unpaid invoices from customers are considered…<\/p>\n","category_list_v2":"","author_info_v2":{"name":"root","url":"https:\/\/swoopfunding.com\/au\/author\/root\/"},"comments_num_v2":"0 comments","_links":{"self":[{"href":"https:\/\/swoopfunding.com\/au\/wp-json\/wp\/v2\/business-glossary\/31555","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/swoopfunding.com\/au\/wp-json\/wp\/v2\/business-glossary"}],"about":[{"href":"https:\/\/swoopfunding.com\/au\/wp-json\/wp\/v2\/types\/business-glossary"}],"author":[{"embeddable":true,"href":"https:\/\/swoopfunding.com\/au\/wp-json\/wp\/v2\/users\/1"}],"wp:attachment":[{"href":"https:\/\/swoopfunding.com\/au\/wp-json\/wp\/v2\/media?parent=31555"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}