As a method for raising working capital, asset-based loans are especially popular for medium and larger sized enterprises. Utilising this type of loan effectively can help businesses to grow by liberating tied up capital that is stored in assets.
Unlike other methods of funding, asset-based loans are not distributed on the basis of cash flows. Instead, they provide immediate working capital based on the value of specific assets that the borrower owns at the current point in time.
For example, a manufacturing company may need a quick and easy way to borrow £200,000. Through an asset-based loan, the company would be able to borrow against the value of any heavy equipment, machinery or property it owns. Typically, banks will lend up to an agreed percentage of the value of the specific assets, known as the loan to value (L.T.V). This can range from 60% up to 90% of the asset value.
In terms of securing the loan, it is generally accepted that the asset/assets used serve as collateral in the event of payment default. Whilst the collateral and the borrowing base often overlap, it is important to note that they serve entirely separate purposes, with the collateral securing the loan and the L.T.V determining how much can be borrowed.
Over time, the perception of asset-based loans has changed significantly. Once considered an option exclusively for businesses with poor credit, they are now widely available from many banks for healthy businesses with sound credit histories.
To find out more about asset-based loans, including their advantages and disadvantages, download our guide below: