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.
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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.
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