Business Startup Loans

Usually, asset based loans have strict loan-to-value limits. These vary from lender to lender and depend on the type security. Indicatively, lenders may limit a loan to somewhere from 50% to 70% of the appraised value of the asset taken as security. For example, if the asset has an appraised value of $1.0 million, the asset based lender may lend up to $0.7 million against that asset. The precise meaning of the term appraised value is important.

The above definition is very broad. It includes many individual types of consumer loans such as a mainstream home mortgage loan from a retail bank. In practice, accounts receivable financing is used to describe smaller lending segment focused on commercial, not consumer, borrowers. In this narrower sense, asset based financing refers to loans secured by tangible assets including real estate (especially commercial property), product inventory, accounts receivable, plant & equipment, machinery, commercial fleet vehicles (trucks, cars, forklifts, etc) as well as intangible assets such as patents, trademarks, documented technology and other forms of intellectual property.

Asset based borrowers tend to be mainly smaller and medium sized firms, including sole proprietors, family-owned firms and subsidiary entities of large corporations. Asset based lenders include specialist units within banks and other financial institutions, including dedicated asset based lenders, investment banks and hedge funds. Accounts receivable factoring is asset based finance. Much commercial property lending is also commonly asset based.

Assume a property investment professional has an opportunity to purchase a commercial property from a distressed seller at a price of $10.0 million. The property professional assesses this price to be at a deep discount of $8.0 million to the true underlying fundamental value of the property. In other words, the property professional estimates that fundamental value to be $18.0 million.

The investor has $2.0 million to allocate to the purchase. He makes an approach to a bank for a conventional property mortgage loan to acquire the asset using it as collateral. The bank refuses the loan stating it requires the investor to contribute a minimum 30% or $6.0 million as equity to the property. Bank policy is to limit exposure in any single property to no more than 70%.

For higher-risk borrowers, asset based lenders may require the granted line of credit be established as a blocked account necessitating approvals by the lender before withdrawals can be made. This stipulation provides the lender with tight control over the funds and allows it to closely review their deployment.

Hedge funds may also engage in high value, asset based loans centered on large, discrete, and specialized assets. They typically participate in these transactions not as a stand-alone activity but rather to support a wider trading or transaction strategy. To illustrate, a firm that owns and operates a positive cash flow project needs new capital to increase capacity. It enters discussion with a hedge fund to arrange a loan with the project as collateral. The fund grants the loan after identifying the project is of interest to a number of potential buyers and assessed these buyers are likely to pay a premium above the loan amount extended to the current owner. Adverse market conditions eventually force the borrowing company into loan default; the hedge fund takes possession of the project and immediately divests it at a profit.

In conclusion, asset based loans are a convenient form of asset-based financing for many borrowers. Like most loans, may involve set-up fees, ongoing administration fees and break fees. However, these fees are typically a small fraction of the total value of the loan. They are usually structured with a single asset category used as security, but multiple categories may be also be used. The loan period is usually fixed short or medium term.