Definition Or Explanation: Asset-based loans are usually from commercial finance companies (as opposed to banks) that are offered on a revolving basis and collateralized by a company's assets, specifically accounts receivable and inventory.
Appropriate For: Companies that may be rapidly growing, highly leveraged, in the midst of a turnaround or undercapitalized. In addition, asset-based financing works only for companies with proven accounts receivable, and a demonstrated track record of turning over their inventory several times each year.
Supply: Overall, the supply of asset-based financing is vast. A large number of commercial finance companies, as well as many banks, have massive pools of capital to lend to businesses. However, for smaller asset-based loans, those of $500,000 or less, the market is considerably smaller. Most asset-based lenders would prefer to make larger loans because the cost to monitor an asset-based loan is generally the same whether it is large or small.
Best Use: Financing rapid growth in the absence of sufficient equity capital to fund receivables and inventory. Asset-based loans can also be used to finance acquisitions.
Cost: More expensive than bank financing since asset-based lenders generally have higher expenses than bankers. Still, pricing is competitive among asset-based lenders. Small asset-based loans can be pricey, though, running 12 percent to 28 percent.
Ease Of Acquisition: Comparatively easy if your company has good financial statements, good reporting systems, inventory that is not exotic and, finally, customers who have a track record of paying their bills. If you don't have any of these, your path to an asset-based loan will be challenging.
Funds Typically Available: $100,000 and greater.
From Where's the Money? Sure-Fire Financing Solutions for Your Small Business, by Art Beroff and Dwayne Moyers. (c) Entrepreneur Press, 1999.