How debt financing secured by an asset works
Access more working capital
Due to the recent economic crisis in many countries, many companies have faced financial difficulties. For this reason, unsecured loans have become difficult to obtain, as many financial institutions are unwilling to grant them. As a result, many companies have decided to use their own assets as collateral for lenders in what is known as asset-based debt financing. For example, asset-based loan financing is a process where corporate assets are used as collateral to secure a loan from lenders. Most of the time, this decision is made by the company when it needs to have more working capital for its expansion. In all asset-based loans, the interest of the lender is secured by the assets of the borrower, which also determines the amount of the loan that a business can access. It is worth noting that both small and large businesses can benefit from a loan. These include wholesalers, retailers, distributors and even service providers. However, many lenders who make asset-based loans want a company with a stable balance sheet and strong assets. distributors and even service providers. However, many lenders who make asset-based loans want a company with a stable balance sheet and strong assets. distributors and even service providers. However, many lenders who make asset-based loans want a company with a stable balance sheet and strong assets.
Who Uses Asset-Based Loans?
These loans are usually recommended when a business needs working capital to continue its normal business activities. The company therefore chooses to use its own assets to obtain financial assistance from lenders. In this case, the assets of the company are used as collateral.
What use of the company as a guarantee?
Many lenders like to take customer accounts as the main guarantee. However, a business can still use its equipment, machinery, real estate and inventory as collateral.
What determines what a company gets?
Not all businesses can benefit from the same loan amount. Sometimes the amount requested by a company may not be given by the lender due to certain rules which guide the loan process. In general, a company can borrow between 75% and 80% of the value of its accounts receivable. On the other hand, when the stocks are given as security, the company is entitled to a loan equal to 50% of the value of the stocks.
What is the cost ?
The cost of these loans depends on the value of the collateral used, the amount of the loan granted and the general risk involved. Often, the cost of the loan is assessed based on the annual percentage rate (APR), which varies between 7% and 17%.
How does the loan due diligence process work?
Before a lender agrees to make a loan to a particular business, he must research the financial condition of the business , the type of collateral used, and consult the financial books of the business.
What are the advantages ?
Loans are very beneficial to a business as follows:
- Can be obtained quickly, unlike other conventional loans which require a lot of documentation, these loans are easy to get hassle free as long as the business meets the loan criteria.
- Financial stability, these loans can cushion a business going through a difficult economic period and quickly bring it back to a stable financial situation. This is due to the fact that they are given in a short period of time in order to increase the cash flow of the business.
- Easier to Obtain Compared to Other Types of Loans, In reality, it is easier to qualify for a loan linked to net assets than other lines of credit. It is attributed to the fact that very few processes are involved. Consider the financial position of the business and the value of the collateral used.