Asset based loan for small business

If a bank decides the business is too risky to justify a loan, another major source of institutional loans is commercial finance companies’ asset-based loans to finance small business. Commercial finance companies purchase time-sales obligations and offer direct leases and secured direct loans including asset-based loans. In 2001, asset-based loans totaled $314 billion and had enjoyed a compound growth rate of over 14 percent during the ten years from 1991 to 2001.

KEY POINT: Asset-based lending uses a company’s assets to secure its debt. In the broadest sense, all secured loans are asset-based loans. Asset-based lending, however, includes only those loans in which the lender looks primarily to collateral, rather than cash flow, for repayment. This collateral may be accounts receivable, inventory, machinery and equipment, or real estate, either alone or packaged in various combinations (for example, receivables and inventory or receivables and machinery).

The commercial finance company is willing to take greater risk than the commercial bank and thrift because it maintains greater super vision of the borrower’s collateral and charges higher interest rates. The commercial finance company carefully monitors the borrower to ensure the collateral exists, its value,and its integrity. From the time the loan is made until it is repaid, the commercial finance lender is an active participant in its management. Collections, for example, are often sent directly to the lender and credited to the loan. Banks rarely police a loan as thoroughly.

WATCH THIS: This monitoring and the constant collateral appraisal process distinguish asset-based loans from other secured commercial loans. It also explains why asset-based loans are an expensive form of borrowing. Asset-based loans are generally priced at prime plus three to four (or more) percent to cover cost of supervision and help given to customers.

To learn more about commercial finance or to obtain a list of commercial finance companies that might be appropriate to help the business, you should contact the Commercial Finance Association.

Related Post

Share the Knowledge: