With asset based lending, the lender takes a blanket lien filing on all of the company’s assets, including but not limited to accounts receivable and inventory. The lender conducts a collateral examination before granting the line. With those results, the lender uses a formula to calculate the borrowing base — the amount of funds that can be advanced.
What distinguishes asset lending from conventional lending is that the borrower must submit monthly reports tied primarily to accounts receivable and secondarily to inventory. If the value of this borrowing base drops, the credit available that month may also drop. In addition, the lender will typically repeat the overall collateral examination annually.
Asset based lending offers businesses several benefits. First, it can provide access to the greatest possible capital at a given time. It can also help a company manage and even out cash flow — for instance, during expected seasonal fluctuations.
This particular structure also allows companies an earlier entry to the bank debt market. It is an alternative to self-financing or finance companies, which are typically more costly and can have more intense reporting requirements.
Due to the frequent monitoring, lenders often are more comfortable working with borrowers who may not yet have the lower risk profile required for conventional lending. Even companies that might be approved for conventional financing may qualify for more funds if they choose an asset-based option instead.
In addition, asset based lending does not have the 30-day clean up required by most conventional lines of credit.
Since the line is secured by the business’ assets, the borrower does put those at stake in the event of a default. And, as already noted, the available credit can fluctuate from month to month.
It’s also critical that the borrower has a good internal finance reporting system — and the dedicated time — to track accounts receivable and inventory on a monthly basis. If the reporting isn’t disciplined and accurate, the lender may cut its commitment quickly.
Companies Most Suited to Asset Based Lending
- Young companies that may have a relatively high risk profile due to limited credit/financial history may find it easier to qualify for asset based lending than other forms of financing.
- Rapidly growing companies outpacing their ability to generate money internally may use asset based lending to help finance day-to-day operations.
- Seasonal or cyclical businesses whose sales tend to occur at a specific, identifiable time of year — such as agricultural enterprises — can use asset based lending to bridge cash-flow gaps.
- Wholesalers, distributors and manufacturers may likewise experience fluctuations in their cash-flow cycles that asset based lending can help smooth out.
On the other hand, certain companies are less suited to asset based lending. These typically include contractors, businesses that rely on progress payment oriented receivables, cash-based businesses (convenience stores, hotels, restaurants) and service industries (law firms, CPAs, doctors).
Factors Influencing Approval
Besides considering the type of company you have, lenders evaluate several other factors when deciding whether to approve a company for asset based financing and when setting the initial credit limit. These variables may include the company’s:
- Credit history
- Years in business
- Collections history
- Inventory (e.g., liquidity, value, turnover rate)
- Borrowing needs — for example, at Rabobank, asset based lending options are available to companies with borrowing needs of $1 million or more
Asset Based Lending With Rabobank
While many commercial banks offer asset based lending, at Rabobank we are proud to focus on small to mid-size businesses. We offer you a customer experience — with personal attention and unfettered access to your banking representative — that most large banks simply can’t give you.
Your Relationship Manager would enjoy the opportunity to talk with you about your financing needs and help you decide whether asset based lending is appropriate for your company.
The information contained in this article is intended for general educational purposes only and is not to be construed as legal, tax, or financial advice. Please consult with your own legal, tax or financial advisor for guidance with your own particular circumstances.