Corporate Finance
Working Capital
Growth Capital
Recapitalization
Refinancing
Debt Financing
Equity Financing
Debt Financing
Asset-Based Financing
Asset-based loans are secured by a company’s assets, including accounts receivable, inventories, equipment, and/or real estate, where the lender takes a first priority security interest in the assets lent against.
Unlike a cash flow loan, the borrowing capacity for an asset-based loan is based on the amount, quality and liquidity of a company’s current and fixed assets. Generally, the current assets of accounts receivable and inventory serve as the borrowing base for a revolving line of credit facility. This type of facility can accelerate a company’s cash flow by allowing it to borrow against the future value of the current assets that are expected to turn into cash in the near future (i.e. using the borrowed funds to finance working capital).
In addition, fixed assets (machinery, equipment and real estate) can be used to collateralize an asset-based loan, frequently serving as the borrowing base for a term loan facility. In this type of structure, a specified amount is borrowed for a fixed period of time, there are regular principal and interest payments, and amounts paid back cannot be re-borrowed. Term loans are typically used to finance larger amounts of funding. There are also special situations where non-traditional assets (trade names and intellectual property) are eligible as collateral.
Asset-based loans offer financing for virtually any purpose, including:
Advantages
Asset-based loans offer protection against the strict financial and operational covenants that are typical in the structure of a cash flow loan. In a cash flow loan, if the company doesn’t achieve its projected EBITDA, realize anticipated operating efficiencies, or manage capital expenditures as stated upon signing the loan, cash flows may be inadequate to service its debt and default of covenants can occur, resulting in steep fees or a call on the loan balance.
As such, asset-based loans provide borrowers with enhanced operational flexibility through all phases of the business cycle. Asset-based lenders have the benefit of liquid assets to protect their loan, thus these loans place less reliance on the borrower’s operating performance, reflected by the fewer number of covenant requirements attached to the loan.
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