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Myths About Asset Based Lending

Apr 2, 2008
The asset based lending industry has acquired an image not considered 'ideal'. Everyone assumes that asset based loans are not as good as unsecured loans. This image is the outcome of misconceptions that people generally have about asset based loans.

In fact, asset based loans are very competitively priced and offer a lot of flexibility and versatility. They are financial tools offered by a variety of lenders including many money center banks. It is also true is that there has been a phenomenal increase in the overall outstanding value of asset-based loans over the last ten to fifteen years. Despite these encouraging figures, myths still continue to haunt this type of lending. Looking deeper there are some myths that are more common among those doing rounds to falsely scare potential borrowers. Here are some myths and facts:

Asset based loans are taken only by companies in poor financial health- This is one myth that is negated by the fact that an increasing number of healthy companies are opting for asset base financing due to the various advantages it offers. The rates are very affordable and it helps them gain extra leverage for business growth. This is further supported by the fact that such borrowers form the major portion of the borrower community of many leading asset based lenders.

Obtaining asset based loans after having unsecured loans affects company reputation negatively- On the contrary, many companies now prefer to switch to asset based lending to avail of the flexibility and other benefits like lesser number of covenants etc. Those familiar with EBITA and other covenants for unsecured loans would be aware of their restrictive nature and how burdensome they may become especially when the economy suffers a slowdown. As against these four of five covenants, asset based loans require just one or two covenants.

The added flexibility to be able to utilize proceeds as required is one very appealing aspect of asset-based loans. It is basically the value of the company's assets pledged as collateral that are of concern to an asset-based lender and the availability of the excess borrowing base. The larger the available excess, the better the chances of the company to suitably react in a crisis.

Asset based loans are only concerned with the collateral value- With the understanding derived from a connection with many types of industries, the asset based lender is better qualified to make a correct assessment of the collateral offered and a proper appreciation of their value can help increase the borrowing capacity of the borrower. Collateral is no doubt a very important component as the very foundation of the loan are the assets pledged as collateral and in the case of borrowers that have a negative cash flow, a close scrutiny of the assets is done. However, those companies that have a solid base and are interested in maximizing operations, there are many asset-based lending solutions that strongly rely on financial performance.

Reporting parameters for asset-based loans are very daunting- This type of financing usually has accounts receivable and inventory as collateral. These change from day to day and borrowers have to report these changes daily/weekly/monthly, depending on the risks involved. However, this has become extremely easy with the advent of new technology and takes very little time and effort to complete.

Asset based loans are costlier- Another myth is that such loans are more costly, where in fact they are more economical than unsecured loans.
About the Author
Accounts Receivable Financing can help your business grow and by solving cash flow problems. The Internal Revenue Service (IRS) has a guide on what defines an Accounts Receivable Financing Company . To receive a quick quote visit this website at: http://www.factorquote.com
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