Asset-Based Lending: Advantages vs. DisadvantagesBanker Resource
July 16, 2013 — 6,105 views
Small as well as large businesses have been greatly influenced by the recent financial crisis in the economy. This has tightened the lending structure for businesses. Unsecured loans of many companies are not getting passed these days due to changes in the lending system.
Many companies have taken the option of ‘asset-based lending’ to overcome this problem. Interestingly, this option of lending was considered the last resort by many companies, but it is now growing to be a preferred lending form. Asset-based lending is generally done when it is not possible for the company to raise funds thorough normal lending routes. Normal lending is done by selling bonds in the capital market, mortgage secured or normal unsecured lending from the bank. Asset-based lending is also preferred when the companies need immediate capital for financing their projects by purchasing inventory as well as debt, mergers, and acquisitions.
This is a favored choice for companies that do not have enough credit ranking, time or capacity, and track record to opt for traditional capital sources. It is also a good way for companies to satisfy their short-term requirements of cash. It has four major asset classes namely inventory, real estate, accounts receivable, and equipment. Recently, addition of intangible assets like customer lists and trademarks have been added to it.
Advantages of Asset-Based Lending
- One of the biggest advantages of this type of lending is that it provides money to fast growing organizations. This helps them to a great extent by addressing the cash flow problem of the companies.
- They are also a good choice for those companies that do not have outstanding credit. The companies can make use of intangible assets to get the loan.
- Another advantage of asset-based lending system is that it is very fast. Applying for a loan to the bank is a lengthy and complicated process. But asset-based lending system is much faster. It also offers a variety of related services like accounts receivable processing, invoices, and collection. The flexibility and speed that this lending system provides helps even the companies with poor credit ratings.
- This lending system offers very good value when the lent assets are good. When the company makes use of inventory as its guarantee or security, the amount of the loan may go up to 80% of the value of the inventory. In case the company lends intangible assets, 75% of them can be credited.
Disadvantages of Asset-Based Lending
- One of the major disadvantages of asset-based lending is that the lender gets to seize the assets in the event of failure of repayment.
- High rate of interest on the assets is another disadvantage of this lending system.
- As opposed to the high rate of interest, the limit of lending may be lower in this approach.
- It requires a lot of monitoring and auditing.
- It also has many appraisal costs.
- Another disadvantage of asset-based lending is that the up-front legal costs of this system are high.