During stressful economic times, businesses have sought out asset-based lending to fuel their recovery as opposed to more traditional corporate loans – and for good reason. Cash flow limitations due to reduced demand, supply chain issues, and global events have made standard borrowing structures unattainable for many organizations.
Asset-based loans are typically offered as revolving lines of credit secured by corporate working assets such as accounts receivable, inventory, and other fixed assets. These assets are analyzed and evaluated via field examinations and appraisals to establish appropriate advance rates on these assets, which provide a level of reduced risk for lenders. The timeline involved to obtain an asset based facility is similar to that of a traditional loan; however, when problematic issues or events arise, the turnaround time is generally quicker and easier for clients.
The pandemic has made asset-based loans more popular than ever, as companies look for new ways to generate working capital and drive growth in an uncertain future. Here are a few of the advantages to asset-based loans to consider:
- Improved liquidity – The most important benefit that your company gets from using asset-based financing is improved liquidity. When used correctly, the asset-based loan facility can provide you with financial stability and predictable cash flow. This benefit can help stabilize operations for companies that are growing rapidly, have tight cash flows, or have seasonal revenues.
- Flexible terms – Asset-based loans generally call for fewer financial covenants and lower financial covenant hurdles than traditional cash flow structured loans. In addition, with asset-based loans, there are few restrictions on how you can spend funds as long as it is for a business purpose, while traditional loans tend to specify and limit the application of loan proceeds. Furthermore, as your company’s sales and profits grow, your assets will grow, thus making it easier for an asset-based lender to increase the amount of your line.
- Easier to qualify – Given the evaluation of the collateral and the structure established to lend, asset-based loans have a reduced risk; and therefore, banks are less focused on the traditional balance sheet evaluation.
Because of the additional due diligence required around your company’s assets, and records, and books, your asset-based relationship manager has a deeper understanding of your business and its intricacies. It is not uncommon for your relationship manager to uncover unforeseen issues before they cause serious problems for your business.