Asset Based Financing & Loans

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Accounts receivable, inventory, and equipment serve as collateral for an Asset Based Financing or Asset Based Loans. Asset based financing is a short term loan secured by a company's assets. An asset based loan is a business loan where the borrower pledges related business assets utilized as collateral. Proceeds are normally used for business related expenses.  Asset based loans are secured by collateral such as inventory, accounts receivables, or equipment. The loan can be secured by one type of asset or a multiple assets combined.

Asset based lending is any kind of lending secured by an asset. This means, if the loan is not repaid, the asset is taken. In this sense, a mortgage is an example of an asset-backed loan. More commonly however, the phrase is used to describe lending to businesses and large corporations using assets not normally used in other loans. Typically, these loans are tied to inventory, accounts receivable, machinery and equipment, but they can also include exotic things like the value of pharmacy script files, a trademark, or whole assets of intellectual property.

This type of lending is usually done when the normal routes of raising funds, such as the capital markets or normal unsecured or secured bank lending is not possible.  Asset based financing can be compared to subprime lending. It is usually accompanied by high interest rates.

An asset based loan is usually designed for the same purpose as a normal business line of credit - to allow the company to bridge itself between the timing of cash flows of payments it receives and expenses. The primary timing issue involves what are known as accounts receivables - the delay between selling something to a customer and receiving payment for it. A non asset based line of credit will have a credit limit set on account opening by the accounts receivables size, to ensure that it is used for the correct purpose. An asset based line of credit however, will generally have a revolving credit limit that fluctuates based on the actual accounts receivables balances that the company has on an ongoing basis. This requires the lender to monitor and audit the company to evaluate the accounts receivables size, but also allows for larger limit lines of credits, and can allow companies to borrow that normally would not be able to.

Factoring of receivables is a subset of asset-based financing and is often used in conjunction with a standard asset based loan facility which uses inventory or other assets as collateral. The lender mitigates its risk by controlling who the company does business with to make sure that the company's customers can actually pay.

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