What is an asset-based loan?
An asset-based loan is secured by a company’s accounts receivable, inventory, equipment, and/or real estate, whereby the lender takes a first priority security interest in those assets financed. Asset-based loans are an alternative to traditional bank lending because they serve borrowers with risk characteristics typically outside a bank’s comfort level. Learn more in the CapitalEyes article: “Six Myths About Asset-Based Loans.
An asset-based loan is different from a cash flow loan in the sense that the loan is not secured by the amount of cash flow that a business accrues but instead by the company’s assets. This could include real estate, inventory, equipment, accounts receivable (A/R) or other forms of collateral. The loan may be secured by a single asset or a combination of assets. Typically lenders will loan at a 50 to 65 loan to value ratio. This means that if an appraisal value given to a specific asset or combination of assets is $1,000,000.00 a lender would loan anywhere from $500,000.00 (50%) to $650,000.00 (65%) to the borrower.
Asset based loans are extended based on collateral placed with the lender. They are a type of secured loan popular because they are often easier to achieve and less expensive than unsecured loans. Even borrowers with bad credit may be able to seek a loan if the collateral is appropriate. Nearly any asset can be used in asset based lending. Stock-Secured Loans Stock-secured loans are extended based on the value of a stock certificate. The original certificate is left with the lender. The lender then extends financing up to a certain amount of the stock’s actual value on the market. For example, a 75% loan-to-value ratio on a stock or group of stocks worth $10,000 would yield a loan worth $7,500. Once the loan is secured, the limits will not change if the stock goes up or down. Savings-Secured Loans Savings secured loans are issued against the amount a borrower has in a savings account. They are usually given by the same institution where the savings account is housed. The savings contin
