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How To Benefit From Asset Based Lending

Aug 17, 2007
Asset Based Lending refers to loans secured by any collateral security such as account receivables, inventory, and other assets in balance sheets. Synonyms for this type of loan are commercial financing and asset based financing. Most of the time, these loans are used to satisfy the cash flow requirements of the company.

Lower Rate of Interest
This type of lending has several advantages. The biggest advantage is it has less rate of interest when compared with an unsecured loan. Lower interest rates are due to the lender's money always being safe. In case of a default by the borrower, the lender can recoup the money by seizing the assets.

It is ideal for financial expansion. Some other purposes for which one can use it are management buy-outs and buy-ins, business acquisitions and mergers, refinancing existing business loans, and turnaround financing. The borrowing base determines the highest amount one can borrow. The latest applicable rates of liquidation, value of inventory, accounts receivables, and fixed assets determine the borrowing base. You can obtain revolving credit and term loans against the security of these assets.

You may get term loans up to 40 percent of the total value of the assets. The term loan ends in 5 to 15 years depending on the life of assets. Several features distinguish it from traditional commercial financing. Asset based lending concentrates more on collateral and liquidity. Cash flow and leverage come second in the priority list. This provides more liquidity to the borrower while requiring less formal financial agreements.

In today's competitive market conditions every business needs resources to survive. With a lack of sufficient resources, a company heading towards growth and a successful future may face major setbacks and failure. This type of lending comes to your aid and can provide enough resources. Many seasoned financial executives are opting for these loans because they are more versatile, cost competitive, and flexible than other debt instruments. However, many people still have the misconception that they should be used as only a last resort because they are expensive and require more reporting. In fact the opposite is true. These loans can help in every stage of business by making operations more flexible. As far as the burden of reporting is concerned, the ubiquitous computers have made it easier than at any other point of time in the past.

Factors Affecting The Market
Here are three main factors affecting the asset based loan market.

1. Drawbacks in the strategies of cash flow loan providers.

2. An economic slowdown.

3. Steadiness and competitiveness of asset based lending.

Additional Help
There are online consulting firms that specialize in asset based lending. Also there is software, which can help your company to stay on track and be a legitimate corporation.
About the Author
David Gass is President of Business Credit Services, Inc. His company publishes a free weekly e-newsletter on Small Business Consulting at their web site http://www.smallbusinessconsulting.com
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