Asset-based
financing originated in Wall Street during the late 1970s as a financing
arrangement to acquire companies by leveraging their assets. In recent years
this industry has flourished, with small businesses contributing to much
of the growth.
This type of financing
is becoming more common, and asset-based lenders play a vital role in the
economy. Domestic and foreign commercial banks, independent finance companies,
floor-planning organizations, factoring organizations and financing subsidiaries
of major industrial corporations are included in the list of asset-based
lenders.
Businesses need money to grow. A business cannot survive just because it
has a better product, an exclusive market or the best method of distribution.
Asset-based financing is a mechanism which provides companies with financing
to meet their general working capital requirements. This financing mechanism
involves revolving lines of credit and term loans secured by accounts receivable,
inventory, machinery and equipment, real estate property and certain other
assets.
Asset-based lenders fund businesses with annual sales of less than $250,000
to more than $1 billion. Credit depends on the type of business and the
content and the quality of the collateral. Asset-based financing is used
to address such business situations as:
Asset-based loans are
utilized mainly by companies with some credit issues. Companies unable to
obtain, or constrained by, conventional lending may have access to larger
overall operating lines of credit with asset-based financing. This solution
is appropriate for companies with proven accounts receivable and a confirmed
track record for rapid inventory turnover. Although asset-based lenders
may not require borrowers to conform to strict financial ratios as in conventional
lending, that does not mean they do not control their money. Some other
requirements that borrowers need to fulfill are as follows:
· The business must have a reasonable net worth and long-term viability.
· Financial statements must be reviewed by a certified public accountant.
· Borrowers must submit a year's worth of monthly projections.
· The principals of the business must guarantee the loan.
· Risk of obsolescence, product substitution or non-performance of
collateral must be at manageable levels.
· The business must have an experienced management team.
Asset-based financing is more expensive than traditional financing since
asset-based lenders generally have higher expenses. However, interest rates
and fees on these types of loans have fallen in recent years due to strong
competition. When evaluating an asset-based loan, borrowers should measure
the cost of financing in the context of the benefits to be received. The
flexibility and cash availability offered by asset-based financing have
allowed a number of companies to take advantage of market opportunities.
Asset-based financing allows a company to demonstrate
how it could perform with a long-term loan in place.
