Asset Based Lending
Asset Based Lending is a professional discipline that allows lenders to grant lines of credit and sometimes term facilities to companies that do not qualify for traditional bank lending for a variety of reasons. Asset Based Lending is able to work through the high leverage, low net worth, sub-standard P&L performance and short time in business and still offer a credit facility to a company. This is done by relying heavily on the collateral provided by the Company to secure the loans. The professional side of Asset Based Lending is to determine the viability of a company despite its shortcomings listed above. Even more important is to determine whether the collateral provided, usually account receivable, inventory and equipment and any other collateral will pay out the granted facility, even in adverse circumstances such as a bankruptcy.
To accomplish this an Asset Based Lender will look very closely at management and very meticulously at inventory levels and its affect on profitability. An expression coined by Storyloan.com is that Asset Based Lending “looks at less, harder”. In other words is the low net worth and low profitability the reality of things - the true numbers. If sales are flat and inventory is up 30% what’s really happening. Are the A/P and A/R numbers and agings accurate and do all the numbers “tie in”. This due diligence is done with experienced credit and collateral officers and an on-site field exam performed by capable auditors. The benefit to the borrower is being able to borrow 10 times your company’s net worth and more if you are still viable with the increased debt load and you have collateral to cover your loan needs. The more expert and better run Asset Based Lending institution should be sought after and not feared by an honest borrower.
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