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Asset based lending: What is it, how to calculate and its advantages

In recent years, asset-based loans have been rising in popularity. It allows you to opt for a loan by securing an asset. In a nutshell, asset-based lending or loan is granted to the borrower when collateralized with assets. For instance, assets such as account receivables, marketable securities, inventory and property, plant and equipment (PP&E) can help in securing a loan. Since an asset secures the loan, you can ensure that asset-based loans are less risky than unsecured lending. Unsecured lending is a loan that is not backed up by assets. Hence, asset-based loans charge a lower interest rate. Well, if the assets are more liquid, it will be less risky, and the interest rate will be even lower. For instance, having an asset-based loan secured by the property is less safe than an asset-based loan secured by accounts receivable. The creditor can find it difficult to liquidate the assets swiftly since the property is illiquid. To know how asset-based loans are calculated and their advantages, you can read further and learn about them.

How to calculate the asset-based loan amount?

Asset-based loans refer to a loan to value ratio. For instance, a lender can state that the loan to value ratio is 80 percent of the marketable securities. It means that the lender will provide a loan of only up to 80 percent of the marketable securities. When it comes to the loan to value ratio, it entirely depends upon the type of assets. So, it is calculated as the loan amount divided by the asset value in which the loan amount is the amount that the lender can loan, and the asset value is the value of an asset that is used as collateral.

For inventories and receivables, the loan to value ratios is 50 and 70 percent, respectively. For example, a borrower owns assets like accounts receivable and machinery and wants a loan of 100,000 dollars. The accounts receivable is valued at 120,000 dollars, whereas the machinery is valued at 250,000 dollars. If the borrower uses one asset to secure the loan, it will be machinery. That’s because 120,000 dollars multiplied by 70 percent result in 84,000 dollars maximum loan amount for accounts receivable, whereas the 250,000 multiplied by 40 percent results in 100,000 dollars maximum loan amount. The loan amount of machinery is greater than that of the accounts receivable. Read more about Top tips for achieving a same day cash loan.

What are the advantages of asset-based loans?

You will be provided with many benefits, and qualifying for asset-based lending is completely effortless. So, you can read further to know the advantages.

  1. It provides flexibility: A plethora of asset-based financing facilities provide flexibility. Well, when it comes to spending money, you can ensure that there are only a few restrictions. But make sure you spend the money on business purposes. The line is tied to the collaterals or the value. If your sales grow tremendously, the line will definitely increase, and the asset-based loans will be approved swiftly. You and your business will not have to go through the process of underwriting. Well, it is crucial for businesses that are growing swiftly and require additional funding.
  2. It provides improved liquidity: One of the important advantages of using asset-based lending is improved liquidity. You can ensure a predictable cash flow and financial stability, so you must make sure that you use it properly. The operations of the growing companies will be stabilized immensely. Additionally, those with seasonal revenues and tight cash flows will have stabilized operations.
  3. It can be obtained quickly: To attain an asset-based loan, your company must meet certain criteria of qualification. You can ensure that the underwriting process will be swifter when compared to qualifying for a line of credit or a conventional loan. Assuming your company has reasonable financial controls, the process might require a few weeks.

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