Asset Based Lending Is Often An Desirable Capital Answer For Asset Rich Firms

asset based loans is a relatively specialized form of debt financing that relies heavily on an asset or assets as security to underpin the loan. In the event of loan default, the ownership of the stipulated security item is seized by the lender. In its most general sense, this type of financing falls within the broad category known as equity or secured lending.

In the case of invoice (or accounts receivable) factoring, the security is the receivables balance owed to the firm by debtor in possession as payment on outstanding invoices. The typical structure for a factoring transaction is for the receivables balance to be legally assigned to the lender (or factoring firm) which then becomes the new owner of those constituent receivable amounts.

Lenders in this segment typically limit the loans to a 50 or 65 loan to value ratio (LTV). For example, if the assessed value of an asset is $2.0 million, a lender might lend between $0.5 million to $0.65 million.

In the case of higher-risk borrowers, lenders may require the line of credit to be set-up as a blocked account where withdrawals must be approved by the lender. This stipulation provides the lender with tight control over the funds and allows it to review reasons for their deployment.

An asset based loan may be established with a revolving credit limit that fluctuates in line with the business needs of the borrower. If set-up this way, it increases monitoring demands placed on the lender and so higher fees may be applied.

Lenders in this segment are mainly specialist units, operating either as stand-alone firms or as divisions within larger financial institutions. Hedge funds may also engage in focused, high value transactions in this debt market centered on large, discrete and special situations. Their transactions are usually designed to support a broader trade or transaction strategy.

Borrowers in the segment are mainly smaller-to-medium sized firms such as sole proprietors, family-owned concerns and individual subsidiary companies of larger corporations. They tend to be non-prime borrowers with relatively limited financing options. Large listed corporations, particularly those that can directly access public debt markets (by issuing debentures, notes, bonds, and so on) are not themselves usually active in this financing segment, although their subsidiaries may be. Larger firms usually have lower cost funding alternatives to rates prevailing in this debt market segment.

To conclude, asset based lending is typically involves a single category of asset taken as security. However, in some cases, a combination of assets may be acceptable. The loan period is usually short term. The lending is viewed as subprime finance accessed by debtor in possession with poor credit history. Examples may include new or start-up companies, early life-cycle firms with limited cash flow and only a short credit history and perhaps more mature firms that already have large debts.
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