Alternative Credit Line for Small Businesses
Most small business owners have heard of the traditional methods of
acquiring commercial line of credit, such as approaching their bank
for a business or SBA-backed loan. However, situations do occur when
commercial credit has been exhausted or is tied up and, for example,
a small business experiences a �cash crunch� because customers are
slow to pay.
These lenders give business owners the opportunity to
secure business credit lines that might normally be outside their
reach. Wikipedia defines asset based lending as:
In the simplest meaning, asset-based lending is any kind of
lending secured by an asset. This means, if the loan is not
repaid, the asset is taken. In this sense, a mortgage is an
example of an asset-backed loan. More commonly however, the
phrase is used to describe lending to business and large
corporations using assets not normally used in other loans.
Typically, these loans are tied to inventory, accounts
receivable, machinery and equipment.
This type of lending is usually done when the normal routes of
raising funds, such as the capital markets (selling bonds to
investors) or normal unsecured or mortgage secured bank lending
is not possible. This is often because the company has exhausted
other capital raising options or needs more immediate capital
for project financing needs (such as inventory purchases,
mergers, acquisitions and debt purchasing). Asset based loans
are also usually accompanied by lower interest rates, as in the
event of a default the lender can recoup their investment by
seizing and liquidating the assets tied to the loan.
Simply put, asset-based loans are based on assets, generally
accounts receivable and inventory which are used as collateral. A
small business is putting its future revenue on the line to gain
access to money right now. Asset-based lenders will advance funds
based on an agreed percentage of the secured assets' value.
Is an asset-based loan for everybody? No. But when a small business
needs cash now and has already exhausted existing credit options, it
can be a godsend.