Characteristics of Asset Based Loans

by Aaron Jones Financial Adviser

Loans which are secured against an asset of a borrower in simple terms are known as Asset based loan. These secured loans are provided to the borrowers against an asset or collateral of the borrower. If the borrower fails to repay the loan amount, the asset is repossessed or sold to cover the debt. Normally these loans are hooked with inventory, accounts receivable, machinery and equipment. This type of asset based lending is normally acquired when the traditional routes of raising funds such as the capital markets or normal unsecured or mortgage secured bank lending is not possible or available. These types of loans are normally taken by the start ups when they don’t have much experience to raise loans. Asset based loans come handy when the company fails to raise capital through the marketplace or requires more immediate capital for project financing needs such as mergers, acquisitions etc. Many traditional and alternative lenders provide asset based loans to both corporate and normal clients. A borrower can default easily with little or no down payment if the business fails to bring in the desired profit. If there is a foreclosure of the business, the lender possesses the collateral, looking to repay its loan from the proceeds of the sale of the collateral of the borrower. Sometimes due to short sale, where the property is overvalued and is actually sold for a lesser amount hence not covering the loan, the lender can then sue the borrower for the remaining balance if it can be obtained. The various characteristics of asset based loans can be:

Property- Just like a mortgage, securing funds for your business against a property is a great way to generate collateral. You can secure funds for your business with higher interest rates and for a longer period of time against the value of the property that is being used as collateral. Property or lands can be used as collateral.

Equipments- Lenders normally look for things that can be liquidized easily and quickly in order to repay the debt. Easy cash is what lenders are more interested in. Construction machinery to manufacturing equipments are what normally lenders look to extend their loan against. Lenders look for more tangible equipments that are more tradable in the market. If the values of the equipments are easily understood then it is automatically attractive to the lenders. Depreciation is also taken into account for equipments when valuation of the equipment is done.

Personal valuables- Personal valuables like gold jewelry, collectibles, antiques etc. are also of great value that can be secured against a loan. It’s always wise to understand that you may risk losing them if you fail to repay the loan amount borrowed. Hence be sure that you can afford to live without your antique collection or your family heirloom gold jewelry before putting them up to obtain a loan. Asset based loans also depends on the depreciation that the asset has faced over the years and its current valuation.

Value- This is of utmost importance. The value of the collateral decides the amount of loan to be provided to the borrower. Normally 50 to 60% of loan to value ratio is obtained in order to secure the collateral against which a loan would be provided to the borrower. If the value of the collateral is less, then lesser amount of loan is provided or loan is denied. Hence current evaluation of the collateral is done to evaluate its current market value

Age- The age of the collateral also plays a major role in deciding the value of the collateral. Not all products value depreciates with age. The value of Land, wine, antiques etc. increase with age and time, increasing their value. Again on the other hand cars, personal assets etc .depreciate with time. Hence the age of the collateral plays an important role in deciding the loan amount.

Type of Collateral- The type of collateral should also be considered when a secured loan is extended against it. Collateral can be a property, antique collection, gold jewelry, luxury yatch or cars, expensive wines or art, etc which have a value of their own appraised by the lenders before any loan is extended to the incumbent.

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