What Is An Asset Based Loan
An asset based loan is a type of business financing that is secured by company assets. Most asset based loans are structured to work as revolving lines of credit. This structuring allows a company to borrow from assets on an ongoing basis to cover expenses or investments as needed.
Who uses asset based loans?
Asset based loans are used by companies that need working capital to operate or grow. Often, companies that request an ABL have cash flow problems. However, many of these cash flow problems stem from rapid growth. The asset based lending facility helps companies manage the rapid growth issues and positions the company for growth.
Who qualifies for asset based lending?
Generally, asset based financing is offered to small and mid-sized companies that are stable and have assets that can be financed. The companys assets must not be pledged as collateral to another lender. If they are pledged to another lender, the other lender must agree to subordinate its position. Also, the company must not have any serious accounting, legal, or tax issues which could encumber the assets.
Most asset based loans have a minimum of $750,000 to $1,000,000 in utilization requirements.
What assets can be used as collateral?
The main collateral for an asset based loan is usually accounts receivable. However, other collateral such as inventory, equipment, and other assets can also be used.
What is the borrowing base? How is it determined?
How does the due diligence process work?
Companies In An Ownership Transition
Often, owners of mid-sized companies find the majority of their wealth tied to the business. The net worth can be substantial, but its also relatively illiquid. So when the owner wants to retire, the ownership group needs to move on to other challenges, or the existing ownership is seeking equity investors to find new opportunities for growth, asset-based lending is a strong alternative. By leveraging the asset base, the company can drive more capital to complete an ownership transition than would typically be obtained through cash flow lending. This additional leverage might pose too much risk for many lending relationships, but the additional security offered through asset-based lending can enable a successful transition.
Do you have a lending relationship that helps you capitalize on opportunity today?
With more than 1,500 deals closed with mid-sized companies and private equity firms over the past nine years, PNC Business Credit can be a resource to help you determine if asset-based lending is right for you. To learn more visit us at donedeal.pnc.com.
What Are Examples Of Current Assets
There are five main categories of current assets.
In order of most to least liquid, here is a list of current assets:
Cash and cash equivalents are the most liquid of assets, meaning that they can be converted into hard currency most easily.
Cash of course requires no conversion and is spendable as is, once withdrawn from the bank or other place where it is held.
Cash equivalents are any type of liquid securities that are not in the form of cash currently, but that will be in the form of cash within a year.
US Treasury bills, for example, are a cash equivalent, as are money market funds.
2. Short-Term Investments and Marketable Securities
Similar to cash equivalents, these are investments in securities that will provide a cash return within a single year.
In the case of bonds, for them to be a current asset they must have a maturity of less than a year in the case of marketable equity, it is a current asset if it will be sold or traded within a year.
Prepaid expenses are funds that have been spent preemptively on goods or services to be received in the future.
They are not technically liquid because they dont earn a company money however, they are listed among a companys current assets because they free up capital to be used later.
Payments to insurance companies or contractors are common prepaid expenses that count towards current assets.
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Is Asset Finance Regulated
The Financial Conduct Authority covers financial services providers for certain regulated activities, including car hire purchase. General business asset finance isn’t classed as regulated by the FCA.
However, a lot of asset finance lenders are FCA-authorised and regulated, and these firms are likely to have rolled out the same processes and practises across their organisation.
A Banks Balance Sheet
A balance sheet is an accounting tool that lists assets and liabilities. An asset is something of value that is owned and can be used to produce something. For example, the cash you own can be used to pay your tuition. A home provides shelter and can be rented out to generate income. A liability is a debt or something you owe. Many people borrow money to buy homes. In this case, the home is the asset, but the mortgage is the liability. The net worth is the asset value minus how much is owed . A banks balance sheet operates in much the same way. A banks net worth is also referred to as bank capital. A bank has assets such as cash held in its vaults and monies that the bank holds at the Federal Reserve bank , loans that are made to customers, and bonds.
Figure 1 illustrates a hypothetical and simplified balance sheet for the Safe and Secure Bank. Because of the two-column format of the balance sheet, with the T-shape formed by the vertical line down the middle and the horizontal line under Assets and Liabilities, it is sometimes called a T-account.
Figure 1. A Balance Sheet for the Safe and Secure Bank
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Myth: Abl Is Only A Loan Of Last Resort
Reality: ABL is really just another capital markets product. Its simply a different way of financing a company that is more focused on asset levels than cash flow.
For an asset-heavy company that has thin margins and doesn’t really have large EBITDA levels, an ABL might be a better fit than for a company that doesnt have a lot in the way of assets, but has a lot of earnings, Downs says. It just really depends on the makeup of the company, but there is still some of that negative connotation out there for folks who just have never dealt with ABL. They had an initial impression and they never spent the time learning the actual facts.
How Does An Asset
With this type of lending, you will be borrowing against your assets. The amount you are granted for your loan, known as the borrowing base, will be established based on a percentage of the assets value.
For your asset-based mortgage, you can use 70% of what you have in retirement and investment accounts and 100% of liquid assets, the value of your bank accounts.
The borrowing base and loan terms will be determined by the lender.
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How Long Is Asset Finance For
Asset finance is usually provided for anywhere between one to seven years, or even longer in some instances . The asset finance company recoups the purchase cost of the asset over the agreed period, plus interest.
The length of time the finance is provided for also depends on how long the asset is going to be âusableâ for, as well as how quickly the lender wants the money back. As a business borrower, youâll have to show that you can afford to make the agreed payments.
Disclaimer For Hong Kong:
Bank of America and BofA Securities are the marketing names used by the Global Banking and Global Markets divisions of Bank of America Corporation. Lending, other commercial banking activities, and trading in certain financial instruments are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, National Association, Member FDIC. Trading in securities and financial instruments, and strategic advisory, and other investment banking activities, are performed globally by investment banking affiliates of Bank of America Corporation , including, in the United States, BofA Securities, Inc. and Merrill Lynch Professional Clearing Corp., both of which are registered broker-dealers and Members of SIPC, and, in other jurisdictions, by locally registered entities. BofA Securities, Inc. and Merrill Lynch Professional Clearing Corp. are registered as futures commission merchants with the CFTC and are members of the NFA.
Bank of America, National Association, Hong Kong Branch, is a branch of a national banking association organized and existing with limited liability under the laws of the United States of America.
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Maximum Liquidity Is Always Available
A huge perk to asset-based lending especially in todays economy is having the availability to liquidize your assets. Why is this so important in times like these? If you need to convert your assets into cash, you can do so at any time. This isnt something you can get with traditional loans, which are based on traditional financial metrics. If youre experiencing high growth due to expansion, an asset-based loan is perfect for your situation.
The Ins And Outs Of Asset
What it is: Simply put, asset-based loans are based on assets, generally accounts receivable and inventory, that are used as collateral. You’re putting your future revenue on the line to gain access to money right now.
Asset-based lenders will advance funds based on an agreed percentage of the secured assets’ value. The percentage is generally 70 percent to 80 percent of eligible receivables and 50 percent of finished inventory.
Related: Taking on Debt to Grow Your Business
How to get it: The range of financial service companies that offer asset-backed lending is huge. The Commercial Finance Associations membership includes banks and many independent finance companies.
For a small business, the key is to find the lenders that are willing to offer lines of credit to younger companies. This can be tricky, and could involve some asking around. Asset-based lenders would prefer to make larger loans because the cost to monitor an asset-based loan is generally the same whether it’s large or small.
Still, securing an asset-based loan should be comparatively easy if your company has good financial statements, good reporting systems, commonly sold inventory, and, finally, customers who have a track record of paying their bills.
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For Residents Of Singapore:
Access to the Sites is by invitation only to institutional investors. The information contained here does not constitute a public offering or distribution of securities in Singapore. The information in these Sites is provided by Bank of America Singapore Limited and is compiled from information prepared by subsidiaries and affiliates of Bank of America Corporation. Your agreement for the use of these Sites is with Bank of America Singapore Limited.
Do I Need To Insure My Assets
It may be a good move to buy insurance to protect your assets. Some of your assets may already be insured certain laws mandate that your home or your car are insured.
Your home insurance may cover the value of some of your belongings, but if you have high-value jewelry, you might consider purchasing separate insurance or add on to your existing home insurance plan. For example, youll typically pay $1 $2 for each $100 of value for jewelry coverage.
You can also protect your income in the event that you are not able to work due to a physical injury or illness. Your job may provide disability insurance, but you also might want to purchase your own policy in case you are hurt or injured outside of work.
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Current Assets And Current Liabilities
Current liabilities are essentially the opposite of current assets they are anything that reduces a companys spending power for one year. Examples include short term debts, dividends, owed income taxes, and accounts payable. Current liabilities are often resolved with current assets. If current liabilities exceed current assets, it could indicate an impending liquidity problem.
Example #: Starting Up A Business
Letâs say you and your friend Anne get together and start a small business. You have a killer idea for an app: it will use cutting edge artificial intelligence technology to automatically call and order coffee from the nearest cafe.
You both agree to invest $15,000 in cash, for a total initial investment of $30,000.
After you deposit the $30,000 in cash into your companyâs business account, the accounting equation for your business looks like this:
Equity$30,000 in stock
Notice how your companyâs total assets have increased by $10,000, and your liabilities have also increased by $10,000?
Unlike example #1, where we paid for an increase in the companyâs assets with equity, here weâve paid for it with debt.
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How Asset Depletion Mortgages Work
Asset depletion loans use your assets as collateral instead of your income.
This program allows you to deplete your assets as a way to count that money as income for the duration of the loan.
There are a few facts and figures borrowers need to understand before diving into an asset depletion program.
Eligible assets for mortgage qualifying
First, understand that only certain types of assets can be used for mortgage qualifying. These typically include:
- Checking or savings accounts
- Investment accounts such as stocks, bonds, and mutual funds
- Retirement accounts such as a 401k or IRA
Not all retirement accounts will qualify, depending on the mortgage borrowers age and potential penalties applied for accessing funds in the account.
Lenders may only allow a partial credit, or no credit at all, for assets in retirement accounts if the mortgage borrower isnt yet at or near retirement age.
How much of your assets are counted?
Even for allowable assets, lenders wont necessarily count the whole amount toward your mortgage income.
- For liquid assets like a savings account lenders typically count 100 percent of the funds
- Investment assets may be calculated at around 70 percent of your total holdings
- For retirement accounts, only 50 to 70 percent of funds may be counted, depending on the borrowers age
The exact calculations vary by lender which means its extra important to compare different mortgage lenders and find an asset depletion program that fits your needs.
You Have The Flexibility To Change Your Growth Plans
Asset-based lending is super-flexible. Its not a one-size-fits-all solution that you would get with traditional financial loans. Your asset-based loan can be custom-designed to meet the individual needs of your business. What if, for example, your growth plan changes halfway through using your credit line? Thats O.K. As long as you communicate with your lender, and your plan involves a smart direction for business growth, you can grow your credit line and get the support you need. You are not locked into any one growth initiative. Asset-based lenders are flexible and here to support your growth, whatever it may be.
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What Is An Asset Depletion Loan
Also known as asset dissipation, asset depletion is a way to qualify for a loan using substantial assets rather than income from employment.
With an asset depletion mortgage, your monthly income is calculated by dividing your total liquid assets by 360 months .
In this way, you can prove you have enough money to cover the loan even without regular income from employment.
Using funds from asset depletion does not mean you have to qualify solely based on your assets. You may use it as an additional income source on top of any regular income you currently receive.
That said, borrowers who use an asset depletion program to qualify do not need to show any other sources of income or employment. If their assets are sufficient to pay for the loan as well as regular living expenses they can qualify based solely on that calculation.
In addition, mortgage borrowers are not required to cash in their assets right away. The assets are only used to demonstrate an ability to make the mortgage and housing payments.
What Types Of Companies Can Benefit From An Asset
Asset-based loans are great for companies who need to balance their cash flow and need an influx of cash to pay regular business expenses such as payroll.
Because asset-based lending works off of assets you already have, these types of loans are also great for businesses that have seasonality and present drastically different high and low revenue generating periods. Asset-based lending provides an influx of cash to help balance out the time period between starting the service/project and receiving payment on your accounts.
Asset-based loans are revolving lines of credit so they continue to have an ongoing repayment process as opposed to taking out long term debt which requires monthly payments, which can be difficult to handle in an off or down month.
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Defi Art Loans And Legacy Systems
The financial business provides essential services such as lending and borrowing. These services usually necessitate the use of an intermediary such as a bank and some level of trust. DeFi intends to revolutionize this industry by utilizing smart contracts and a decentralized processing and validation system. In a nutshell, it’s lending without a bank.
Currently, the most common application of decentralized lending and borrowing appears to be lending for cryptocurrency speculation. Yield farming could be another reason for lending and borrowing cryptocurrencies. It allows one to obtain the governance token, which could be worth more than the difference between lending and borrowing rates.
Physical art loans are typically revolving lines of credit secured by works of innovative visual art. The art world’s recurrent concerns with authentication, variations in market value, the requirement to establish a first-priority security interest in the artwork, and the possibility of theft or casualty loss are all addressed in these loans. Because of the affluent nature and frequently prominent identity of the borrowers under these credit facilities, default risks on these loans have traditionally been thought to be minimal.
NFT loans are loans based on the value of NFTs, not loans of NFTs.