A
specialized method of providing structured working capital and term
loans that are secured by accounts receivable, inventory, machinery,
equipment and/or real estate. This type of funding is great for startup
companies, refinancing existing loans, financing growth, mergers and
acquisitions, and management buy-outs (MBOs) and buy-ins (MBIs). An
example of asset-based finance would be purchase order financing; this
may be attractive to a company that has stretched its credit limits with
vendors and has reached its lending capacity at the bank.
The
inability to finance raw materials to fill all orders would leave a
company operating under capacity. The asset-based lender finances the
purchase of the raw material, and the purchase orders are then assigned
to the lender. After the orders are filled, payment is made to the
lender, and the lender then deducts its cost and fees and remits the
balance to the company. The disadvantage of this type of financing,
however, is the high interest typically charged - which can be as high
as prime plus 10%. In the simplest meaning, asset-based lending is any
kind of lending secured by an asset. This means, if the loan is not
repaid, the asset is taken. In this sense, a mortgage is an example of
an asset-backed loan. More commonly however, the phrase is used to
describe lending to business and large corporations using assets not
normally used in other loans.
Typically,
these loans are tied to inventory, accounts receivable, machinery and
equipment. This type of lending is usually done when the normal routes
of raising funds, such as the capital markets (selling bonds to
investors) or normal unsecured or mortgage secured bank lending is not
possible. This is usually because the company was unable to raise
capital in the normal marketplace or needs more immediate capital for
project financing needs (such as inventory purchases, mergers,
acquisitions and debt purchasing). It is usually accompanied by higher
interest rates, and can be very lucrative for the parent company. For
example, the bank Wells Fargo made more money from asset-based lending
business than it did the rest of its corporate business (both lending
and fee based services). Many financial services companies now use
asset-based lending package of structured and leveraged financial
services. Most banks, both national investment banks (Goldman Sachs,
RBC) and conglomerates (i.e. Citigroup, Wells Fargo), along with
regional banks, offer these services to corporate clients.
