Finding Capital

Finding Capital

Understanding Asset-Based Lending

For businesses seeking working capital to run their operations effectively and to finance growth, asset-based lending may be an excellent solution.

In its simplest form, asset0based lending involved a loan or line of credit secured by business assets under which the financial institution will advance funds based on a formula. The formula is usually a percentage of the current value of the  eligible assets. The assets usually consist of the borrower's accounts receivable and inventory, but sometimes other assets may be used. The advance percentage will depend on the assets being pledged. For accounts receivable and inventory, the percentage will typically range between 75 to 85 percent and 25 to 60 percent, respectively, and each is subject to certain eligibility criteria. A lender will usually conduct periodic audits to determine the  current value and eligibility of the assets. In addition, borrowers typically are required to provide a lender with various reports, such as accounts receivable agings and inventory valuations.

 Asset-based lending typically provides a low interest rate and favorable repayment terms. For the most part, asset-based lending is typically structured as a revolving line of credit that businesses can draw upon when needed, allowing them to avoid making fixed payments of principal and interest and incurring unnecessary interest. Because of the nature of asset-based lending, business usually use such loans for day-to-day cash flow needs rather than for purchases with a set dollar amount, such as equipment or other property.

It is important to bear in mind that a business must maintain the value and eligibility of each asset to ensure that it remains available for financing under the advance formula. For example, in the case of accounts receivable, the receivables in an account which remain unpaid after a certain period become ineligible for financing.

"Borrowers also need to make sure they are getting the maximum amount of advance they can get on the asset," says Barry Sloane, CEO of Newtek, a company that provides business services to small and medium-sized companies throughout the United States. "They should be aware of market rates or consult with an a experienced adviser."

Most small or medium-sized businesses can benefit from asset-based lending as long as they have appropriate assets to secure the loan or line of credit. Before approaching al lending institution, business should be prepared to provide two to three years of financial statement as well as business projections for the next tow to three years. It is recommended that a business also hire legal counsel with experience in asset- based lending to assist in negotiating the terms and structure of the transaction. Obtaining financing typically takes about 45 to 60 days, so businesses should apply to their financial institution as soon as they know they are going to need it.

Aset-based lending can be an effective tool for a growing business.

"The most important aspects for the borrower are negotiating the advance and the interest rates," he says. "OTher than that, the most important thing is making sure the asset is not impaired."

This article was supplied by City National Bank

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