Asset Based Lending vs Bank Financing

Asset Based Lending

Asset-based lines of credit refer to loans secured by a wide variety of assets such as accounts receivable, equipment, and inventory. Asset-based lenders rely on the value of the underlying collateral to minimize the loan’s credit risk. Asset-based lenders are sometimes referred to as Secured Lenders.

The primary difference between asset-based lending and traditional bank lending is what the lender looks to when underwriting a loan. A traditional lender will look first to the cash flow then to collateral. An asset-based lender looks to collateral first. Since traditional lenders underwrite cash flow as their primary repayment source, they typically require less collateral controls and monitoring, but more financial covenants.

For asset rich companies, an asset-based loan may make more funds available because it is not based strictly on future cash flow predictions. Additionally, the structure often requires fewer covenants, providing more flexibility for many borrowers.

Many companies actually prefer asset-based lines of credit to bank financing, even if they can qualify for a bank loan. Here are a few reasons why:

  • Asset-based lines do not require an annual clean up of your account. In other words, unlike banks which generally require you to have a zero balance at least once every 12 months, our lines are open for you to use every day without worrying about zeroing out your balance.
  • Asset-based lines require much less collateral than a bank will ask for. Asset-based lending advance percentages are much higher than the bank offers, meaning you do not have to put up as much collateral to obtain the same amount of money.
  • Asset-based lines are not subject to routine bank regulatory reviews. We do not have a board of directors that reviews your line each month or quarter and determines that you no longer fit the lending parameters.
  • Asset-based lenders are not as concerned with personal credit histories or credit scores like a bank. Our lines are based on the collateral we connect to the transaction, not the credit score or history of the principals.
  • Asset-based lines allow you to manage your cash flow how you want. You only pay for the amount you use, unlike many bank loans where you receive a lump sum at closing and make a fixed payment every month based on the original loan amount.

Contact SouthStar Capital to learn more about Asset Based Lending and the options available to your company.