Asset Based Lending In the Capital Markets

An Asset based loan is when a borrower avails of a loan against a borrowing base that is the assets that the borrower might possess at the time of the loan. A borrower might require an asset based loan to expand his/her business or to fund new acquisitions or mergers, or for a turnaround of his company or to stave away impending bankruptcy or even for the purchase of new plant and machinery.

The term borrowing base implies all the assets of the business or company including real estate, existing plant and machinery, inventory and even the receivables of the company, i.e. material sold on credit, but payments not yet received, or even purchase orders or letters of credit from overseas clients. Asset based lenders can show more flexibility, while approving loans, since they have the borrower's assets as collateral in case of any problem in recovering the loan amount and can also be flexible in the mode of repayment.

Borrowers should compare the cost of availing an asset-based loan with a traditional loan and also measure it against the benefits offered by availing the loan. But, whereas traditional lenders would advance loans against only fixed assets as collateral, asset based lending companies, not only advance loans against fixed assets, but also against receivables and they could also take future profits into account, which traditional lenders would not consider. Also, in a traditional loan, a borrower might just get a fixed amount, whereas in an asset based loan, the amount might vary as per the borrowers' current and future standing.

So, if borrowers have limited fixed assets, but show great future potential and have a healthy receivable report in their hand, then asset based lenders would be willing to advance bigger loans to them. Borrowers with huge orders from credit worthy clients or borrowers facing liquidity problems due to seasonal sales could also benefit from asset based lending. Borrowers have to submit regular details of the current status, not only of their property, but also of their receivables to their lenders as per their requirement.

However, the credit crunch especially in the US market has now put some strain on the traditional lending institutions, such as banks, since the inter bank liquidity crunch has now spread from the US to the UK and also to other European countries. With banks tightening their lending norms and the prices of real estate sliding southwards, this could turn out to be an advantage for asset based lenders, who could see more borrowers at their doorsteps. The problem is that the fixed assets, which are to be attached as collateral, are reducing in their market value on a day-to-day basis and this could affect both the lenders and the borrowers.

However, if the borrowers' receivables are healthy and if his business shows future potential, then an asset based loan is a better option to the now strictly monitored traditional loan. So, for medium to large corporations requiring capital for mergers or acquisitions, or even restructuring during these tough times, asset based lending groups can provide customized solutions, as per the corporations needs.

So, whatever the sector, asset based lending companies can tailor make a suitable loan to suit any corporation or companies or businesses and these tough times may see them veer away more from the strict rules of lending banks to a more flexible asset based lender.