What is an Asset-Based Loan? Typically, asset-based loans are based on the value of a business’ assets, specifically, accounts receivable and inventory.
If for example, a business is highly leveraged or undercapitalized, an asset-based loan may provide a viable source of operating capital. This type of financing is based on the liquidation value of the account receivable and inventory and not the cash flow of the business. This is important when a business is over-leveraged i.e., too much debt and cannot afford additional debt.
Generally, asset-based loans are less difficult to obtain if a business has the following:
- Good financial statements,
- Customers who pay their bills,
- Good reporting system, and
- Quality and relative liquid inventory
An asset-based loan is a revolving loan since receivables and inventory are typically cyclical. Uses for this type of financing are as follows:
- Working capital,
- Equipment purchases,
- Cash flow
A lender, when analyzing how much to lend will lend between 25% to 40% of the value of the inventory or 75-80% of the value of the business’ receivables.