What is an asset based loan?
An asset-based business line of credit is usually designed for the same purpose as a normal business line of credit – to allow the company to bridge itself between the timing of cashflows of payments it receives and expenses. The primary timing issue involves what are known as accounts receivables – the delay between selling something to a customer and receiving payment for it. A non asset based line of credit will have a credit limit set on account opening by the accounts receivables size, to ensure that it is used for the correct purpose. An asset based line of credit however, will generally have a revolving credit limit that fluctuates based on the actual accounts receivables balances that the company has on an ongoing basis. This requires the lender to monitor and audit the company to evaluate the accounts receivables size, but also allows for larger limit lines of credits, and can allow companies to borrow that normally would not be able to. Generally, terms stipulating seizure of collateral in the event of default allow the lender to profitably collect the money owed to the company should the company default on its obligations to the lender.Factoring of receivables, is a subset of asset-based lending (which uses inventory or other assets as collateral). The lender mitigates its risk by controlling who the company does business with to make sure that the company’s customers can actually pay.