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How to Get an Asset Based Loan

Traditional Banks may have significant problems with asset-based loans. Banks are limited by the internal credit granting philosophies and federal regulations. Asset-based lenders that are either nonbanks or separate subsidiaries of banks are not subject to such restrictions. This gives asset-based lenders the ability to finance thinly capitalized companies.

Asset Based Loans are usually made by a Bank's Assets Based Lending Division, Commercial Finance Companies and Private Capital Sources. This kind of Financing is usually used in the absence of sufficient equity or more conventional loan, by the companies that do not have the credit rating or track record to qualify for more traditional types of financing, may be rapidly growing, highly leveraged, in the midst of a turnaround or undercapitalized. Asset-based lenders focus on the quality of collateral rather than on credit ratings.

Most asset-based lenders would prefer to make loans larger than $500,000, because the cost to monitor an asset-based loan is generally the same whether it's large or small. Asset Based Lenders generally have higher expenses than Bankers, therefore Assets Based Loans are more expensive than bank financing.

Assets Based Loan is the loan collateralized by an asset or combination of assets. If loan is not repaid a lender has the right to seize the underlying collateral. In the corporate world a loan is tied to the inventory, accounts receivable, purchase orders, machinery and equipment. However, Private Capital Sources might be able to secure a loan against Real Estate, Paintings, Wine Collection, Work of Art, Jewelry, Publicly Traded Securities, etc.

Assets Based Financing takes place when borrower is unable to raise capital in the normal marketplace or needs more immediate capital for project financing needs, such as inventory purchases, acquisitions and expansions. An Asset Based line of credit is usually designed to allow the company to bridge itself between the timing of cash flows of payments it receives and expenses - the delay between selling something to a customer and receiving payment for it.

The revolving credit limit fluctuates based on the actual accounts receivables balances that the company has on an ongoing basis. A lender will monitor and evaluate the accounts receivables size, that in exchange allows for larger limit lines of credits. As a protection, terms stipulating seizure of the collateral in the event of default allow the lender to profitably collect the money owed to the company in the case of default.
The lender hedges its risk by controlling who the company does business with to make sure that the company's customers can actually pay, by requiring that the company deposit all of its funds into a "blocked" account. The lender then approves any withdrawals from that account by the company.

The reason to establish a Revolving Line of Credit is to maximize the lending capacity available to the borrower. The line of credit typically is secured by the company’s receivables, equipment and inventory. Term of a revolver is usually one to three years. The borrower grants a security interest in its receivables, equipment and inventory to the lender as collateral to secure the loan. The borrowing base consists of the assets that are available to collateralize a revolver. The size of the borrowing base correlated with the borrower’s current assets , but limited to the overall revolving line's of credit size. As the borrower generates additional receivables from sales, increases amount of the inventory, acquires new equipment, the borrowing base will reflect all the changes that can be augmented on the monthly basis, but should be compared to the balance sheet for consistency.

Hard Money, Bridge Financing and Mezzanine Loans are also Assets Based, but used as a last resort by the borrowers that will not be approved by the more conventional lending sources or when available amount from these sources has been exhausted.

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About the Author

Yury Iofe, Universal Business Structured Solution
Princeton, NJ 08540

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