Asset-Based Lending
AdvancedAsset-based lending is a type of business borrowing secured against specific assets, such as receivables, inventory, equipment or property, where the amount available depends mainly on the value of those assets.
Traditional business loans focus heavily on a company's profits and cash flow. Asset-based lending focuses on the value of the collateral. This can make it suitable for businesses with significant assets but uneven profits, such as those growing quickly, going through seasonal swings or recovering from difficulties.
Lenders usually advance a percentage of each asset's value, called the advance rate. For example, a lender might advance up to 85% of eligible receivables and 50% of eligible inventory. A company with 1,000,000 of receivables and 600,000 of inventory could borrow up to 850,000 plus 300,000, or 1,150,000.
The amount available, called the borrowing base, changes as asset values change, so lenders monitor the collateral regularly, often requiring frequent reports and audits.
Asset-based lending can provide flexible funding, but it can be more expensive and involve close monitoring. If the borrower defaults, the lender can take and sell the pledged assets.
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