Asset Based Loan: How It Works & Key Benefits Explained

With an asset based loan, the assets you already have can help you secure financing. It could be money customers owe you, stock sitting in your warehouse, or certain business assets. The lender checks what those assets are worth and uses that assessment to decide the loan amount. It can be a useful source of working capital, but there's a catch: you could risk the pledged assets if you don't repay the loan.

Quick Reads

• An asset based loan allows a business to use existing eligible assets to obtain finance.

• Asses based type of financing can help cover that gap when customers take longer to pay, or inventory takes time to sell.

• The lender will assess the value of the property pledged as security and use this figure to decide how much you can borrow.

• Certain facilities work as revolving credit, allowing businesses to draw, repay, and access funds again within the approved limit.

• If the loan isn't repaid as agreed, the lender may be able to claim the assets pledged as security.

If you are wondering what is asset based loan, in simple terms, it is a secured form of business financing where a company pledges its assets to get the funds it needs. Depending on the lender and the business, these assets could include unpaid invoices, inventory, equipment, or fixed assets.

For example, suppose a business has sold its goods but is still awaiting payments from its customers. The business may be able to borrow against those unpaid invoices instead of waiting for the payments to come in.

The process generally works as follows:

1. Start with the Assets: Initially, the business will give the lender a list of what it is prepared to put at stake. The lender examines each one on the basis of its value, liquidity, and quality before accepting or rejecting each item of collateral.

2. Calculate the Lendable Value: The next step is to determine how much financing those assets can actually support. A lender may use an advance rate or apply a discount, so the borrowing value can be lower than the assets' market value.

3. Determine the Borrowing Capacity: The lender combines the collateral assessment with the business's financial position to arrive at an appropriate borrowing limit.

4. Make the Financing Available: Once the agreement is finalized, the business can draw the approved funds. Depending on the arrangement, financing may come through a term loan or revolving facility.

5. Review the Collateral Periodically: The lender may continue to monitor the collateral and the business's financial health during the lending period. This can include reviewing inventory, receivables, and other pledged assets.

For businesses with substantial assets but tighter cash flows, asset based loans can provide an additional source of liquidity.

Access to Working Capital

The biggest advantage is that businesses can unlock cash tied up in assets. For example, receivables that are yet to be collected can potentially support financing. For many businesses, unpaid invoices and inventory can be useful when they need more funding.

Potentially Higher Borrowing Capacity

A business with substantial eligible assets may be able to access more financing than it could through an unsecured facility. However, the final amount depends on the lender's assessment and applicable advance rates.

Useful for Growing Businesses

Growing firms may require cash in order to pay for stock, pay suppliers, or to deal with the lag between actually making a sale and receiving the money. Asset based lending can help bridge this working capital gap.

Greater Flexibility

Some asset based facilities operate as revolving lines of credit. This enables a business to both borrow and repay the funds according to its working capital requirements, subject to the terms of the facility.

Asset backed loan and asset based loan can sound quite similar but are different structures.

An asset based loan generally involves a business pledging specific assets, such as receivables or inventory, as collateral for its borrowing. With “asset backed” financing, the assets sit behind the financing arrangement. They could be a pool of loans, receivables, or other assets that help support the funding.

So, while both involve assets supporting financing, the specific meaning of both asset based and asset backed loan depends on the financial structure and product.

The main risk is linked to the collateral. If the borrower fails to meet the loan terms, the lender may have rights over the pledged assets, subject to the agreement and applicable law.

Another consideration is that collateral values can change. If the value or quality of the assets falls, the lender may require additional collateral or adjust the borrowing availability according to the terms of the facility.

Before taking an asset based loan, check:

• Which assets are being pledged?

• How will they be valued?

• What percentage of their value can be borrowed?

• What monitoring or reporting is required?

• What happens if collateral value falls?

• What are the interest and other charges?

• What happens if a repayment is missed?

An asset based loan can be a useful option for businesses that have eligible assets and need additional working capital. But business owners may also have personal financial needs to manage while they are building and growing their ventures.

At Finnable, we offer a personal loan of up to ₹10 lakh with interest rates from 16% to 30.99% p.a., depending on your credit profile. If you meet our criteria, you could have your application approved in as little as 60 minutes.