Finance Shire

In asset-based (or equity-based) lending, a borrower puts up a particular resource such as business real estate, and if the loan taken against the resource isn’t repaid under the agreed-upon terms, the lender then takes possession of the resource. Car financing or mortgages are examples of asset-based lending. However, the term generally refers to a business receiving short-term loans leveraged against their inventory, accounts receivable, machinery and other equipment to cover immediate expenses.

Banks would rather lend against physical assets, but will consider stock, patents and positively achieving receivables for lower amount loans. Lending based on equity is usually the best option when other avenues of acquiring working capital such as stock sales, mortgage-secured or unsecured loans aren’t possible and money is needed quickly for things like payroll, inventory, mergers, acquisitions or other time-sensitive costs.

The issue that asset based lending most directly addresses is a matter of timing: the lag between the outflow of expenses and the inflow of receivables. Capital may be crucial for payables while receivables are still outstanding; asset lending limits rely on the expected receivables. The lender focuses on actual assets and actual incoming receivables rather than the regular model, which puts emphasis on balance sheet ratios and cash flow predictions as loan criteria. They may take full possession of the borrower’s receivables rather than using them as collateral.

Companies that benefit most from asset-based loans are businesses that have well performing receivables and are expanding faster than their cash intake or those that can’t afford operating expenses due to a lack of capital funding. Asset based financing works well with producers, allocators and service companies, which may have a debt-heavy balance sheet and whose cyclical needs and trade rotations regularly interrupt positive cash flow.