Asset Based Lending
Asset based lending, or accounts receivable and inventory lending, finances seasonal and occasionally permanent working capital. These facilities are typically in the form of revolving credit lines, collateralized with A/R and inventory, and are subject to a periodic borrowing base.
With this type of financing, lenders closely control credit availability and collateral. Asset-based lenders typically use a borrowing-base formula (derived by multiplying the value of eligible collateral by an advance rate or discount factor), control cash receipts, and carry out field audits. Collateral consists predominately of accounts receivable and inventory. Because greater emphasis is on collateral (than in cash flow lending), ABL is structured so that collateral will be available if the loan must be liquidated. ABL is sometimes referred to as “commercial finance” lending.
Typical advance rates are 75-80% of receivables 40-50% of inventory. Appropriate advance rates may be lower depending on the specific collateral. Generally, financial institutions would want to exclude receivables more than 90 days past invoice (assuming 30 day terms). Receivables from related parties are also typically excluded from the borrowing base.
The most commonly used asset based lending definition concerns the use of collateral to secure a loan. Essentially, asset based lending arrangements require that borrowers put up an item of value, usually in the form of inventory or accounts receivable, in order to provide a guarantee that the funds will be repaid as agreed. Collateralized loans offer a lower degree of risk for lenders and are more likely to gain approval for borrowers, making them a good solution for most lending needs. Asset based lending consultants provide added services to lenders by evaluating the collateral offered and determining its true market value; they may also perform audits of the records provided by the borrower to ensure the most accurate assessment of value and worth. CNF Exchange provides a convenient venue where lenders and borrowers can connect directly to create mutually beneficial business arrangements. By taking advantage of the added services available from CNF Exchange, lenders can identify qualified borrowers for their available investment capital.