Asset Based Lending is a type of revolving commercial financing that allows a company to borrower against a discounted value of their assets. Asset based lenders focus on the value of the collateral during the underwriting process more than the credit history of your company.
Asset based loans usually have several different collateral pools and advance rates as part of the structure.
The followng will be the basics of an asset based loan:
Accounts Receivable - Typical advance rates between 80% and 90%. Most asset based loans have the majority of the loans against the accounts receivable.
Inventory - Typical advance rates between 35% and 65%. Advance rates depend on the saleability of the inventory in a liquidation. The more specialized the inventory, the lower the advance rate
Machinery and Equipment - Advance rates for asset based loans are typically 60% of the orderly liquidation value. Most lenders will require the Machinery and Equipment to be reappraised every year.
Real Estate - Advance rates are usually 50% of the appraised value.
Asset based loans typically require the borrower to revalue the assets every time they take an advance. This is done by submitting what's called a "borrowing base" to the asset based lender that is basically a spreadsheet that gives the current value of the assets. Because the value of accounts receivable and inventoy change often, the borrowing base calculations focus on these assets.
Most asset based lenders require a personal guaranty from the majority owners of the company.
Typical asset based loans require that all customers of the borrower remit payment for invoices to a lockbox controlled by the lender.
All asset based loans have loan covenants. These could be very tight financial covenants based on the cash flow and balance sheet of the business.
because Asset based lending is used for companies with revenue from $1,000,000 to well over a Billion, pricing varies greatly. Large, strong borrowers can borrow at close to commercial paper rates but most asset based loans are made to companies with revenue less than $100,000,000. The "all in rate" for these loans is typically between LIBOR + 8% and LIBOR Plus 20%. Rate depends on the size of the loan and the financial strength of the borrower.
Underwriting an asset based loan takes between 30 and 60 days. The lender will usually send a field examiner into the business to exam the books and records. Expect to have most of your assets appraised. The cost of the due diligence will be the responsibility of the borrower. Including legal costs it is not unusual for the total expenses to exceed $100,000 and could be as much as $1,000,000.
At Fast A/R Funding we focus on lending against accounts receivable to companies with revenue less than $10,000,000. We don't charge our clients for due diligence and because we only lend against accounts receivable the entire process is usually done in under a week.
Our system is completely electronic so we are able to keep overhead down and pass that cost savings along to our clients by eliminating line fees, wire fees and monthly maintenace fees. With Fast A/R Funding you only pay for what you use.
For more information about our electronic, online financing program please click the button below.