Lending Bank
Asset Based Lending in Capital Markets
An asset-based loan is when a borrower uses a loan against a borrowing base, which is the assets that the borrower may have at the time of the loan. A borrower may require an asset-based loan to expand his business or to finance new acquisitions or mergers or to a reversal of his company or to stave off impending bankruptcy or even the purchase of new machinery and equipment.
The term loan base implies all assets of the company or business, including real property, existing plant and machinery, inventory and even claims the company, that material sold on credit, but payments are not received, or even purchase orders or letters of credit from overseas customers. Asset-based lenders can show more flexibility, while approving loan when the borrower has assets as collateral in case of any problem in recovering the loan and can also be flexible in the way repay.
Borrowers should compare the cost of using an asset-based loan with a traditional loan and also measure it against the benefits of using the loan. But whereas traditional Lenders will encourage loans only fixed assets as collateral, asset based lending business and not only advance loans against fixed assets, but also against receivables and they could also take into account future profits, which traditional lenders would not consider. Even in a traditional loan, a borrower only a fixed amount while in an asset-based loans, the amount may vary as per borrowers' current and future status.
So if borrowers have limited fixed assets, but shows great potential for the future and have a healthy credit report in hand, as asset-based lenders would be willing to encourage greater lending to them. Borrowers with large orders from creditworthy customers or borrowers from liquidity problems due to seasonal sales could also take advantage of asset based lending. Borrowers have to submit regular information about the current status, not only their property but also of their debts to their lenders as per their requirements.
However, the credit crisis, especially in the U.S. market now put some pressure on the traditional lending institutions such as banks as interbank liquidity crunch has now spread from the U.S. to Britain and also to other European countries. As banks tighten their lending standards and real estate prices moving southwards, this may prove to be beneficial for asset based lenders, which could see more borrowers on their doorstep. The problem is that the fixed assets to be attached as safety, reduction in their market on a day-to-day basis and it can affect both lenders and borrowers.
But if borrowers' debts are healthy and if his firm showing a future potential as an asset based loan is a better chance that they are now closely monitored traditional loans. So, for medium and large companies that require capital for mergers or acquisitions, or even restructuring in these hard times can be asset based lending group providing tailored solutions as per company needs.
So whatever the sector, asset based lending businesses can tailor make a suitable loan to suit any business or corporations or enterprises, and these hard times could see them drop more from the strict rules for lending banks to a more flexible asset based lender.
About the Author
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