Asset-based lending is a type of financing where a borrower uses their assets as collateral to secure a loan. This form of lending is widely used by businesses to access capital and improve their financial position. In this article, we will explore the different types of assets that are commonly used in asset-based lending and how they can benefit businesses.
1. Accounts Receivable: Accounts receivable is the most common type of asset used in asset-based lending. It refers to money that is owed to a company by its customers for goods or services that have been delivered, but payment has not yet been received. In asset-based lending, a company can use its accounts receivable as collateral to secure a loan. This is known as accounts receivable financing. The lender will advance a percentage of the accounts receivable amount, usually ranging from 70% to 90%, and will collect the payments directly from the customers. This type of lending is beneficial for businesses that have a large amount of outstanding invoices, as it provides them with immediate access to cash flow.
Example: A manufacturing company has a large order for their products from a client, but they do not have the funds to cover the production costs. They can use their accounts receivable as collateral to secure a loan and use the funds to fulfill the order. Once the client pays for the products, the lender will receive the payment and the remaining balance will be returned to the company.
2. Inventory: Inventory refers to the goods or raw materials that a company has in stock. It can include finished products, work in progress, and raw materials. Inventory can be a valuable asset for businesses to use in asset-based lending, particularly for companies that have a seasonal or cyclical business model. Lenders will evaluate the inventory value and advance a loan based on a certain percentage of that value. The inventory will serve as collateral for the loan, and the lender will have the right to take possession of the inventory if the borrower defaults on the loan.
Example: A fashion retailer has a large amount of inventory in stock for the upcoming holiday season. They need funds to cover their marketing and advertising expenses. They can use their inventory as collateral to secure a loan, which will provide them with the necessary funds to promote their holiday collection. Once the season is over and the inventory has been sold, the loan can be repaid.
3. Equipment and Machinery: Equipment and machinery are tangible assets that are used to generate income for a business. In asset-based lending, companies can use their equipment as collateral to secure a loan. The lender will evaluate the value of the equipment and advance a loan based on a percentage of that value. This type of lending is beneficial for businesses that require large, expensive equipment to operate, such as construction or manufacturing companies.
Example: A construction company is bidding on a large project that requires specialized equipment. They do not have the funds to purchase the equipment, so they use their existing equipment as collateral to secure a loan. With the additional funds, they are able to purchase the necessary equipment and complete the project, which will generate income for the company.
4. Real Estate: Real estate refers to land and any buildings or structures that are built on it. Businesses that own real estate can use it as collateral to secure a loan. The lender will evaluate the value of the property and advance a loan based on a percentage of that value. Real estate can be a valuable asset for businesses that have excess land or property and want to leverage it to access capital.
Example: A hotel chain owns multiple properties and needs funds to renovate one of their properties. They can use the property as collateral to secure a loan, which will provide them with the necessary funds to renovate. Once the renovations are complete, the property’s value will increase, and the loan can be repaid.
In conclusion, asset-based lending offers businesses a way to access funds by using their assets as collateral. These assets can include accounts receivable, inventory, equipment and machinery, and real estate. By leveraging these assets, businesses can access immediate cash flow, fund growth and expansion, and improve their financial position. It is important for businesses to carefully evaluate their assets and the terms of the loan to determine if asset-based lending is the right option for them.