Asset-based lending is the business of loaning money in an agreement that is secured by collateral. An Asset-based loan or line of credit may be secured by inventory, accounts receivable, equipment, or other property owned by the borrower.
Many businesses need to take out loans or obtain lines of credit to meet routine cash flow demands. For example, a business might obtain a line of credit to make sure it can cover its payroll expenses even if there's a brief delay in payments it expects to receive.
If the company seeking the loan cannot show enough cash flow or cash assets to cover a loan, the lender may offer to approve the loan with its physical assets as collateral. For example, a new restaurant might be able to obtain a loan only by using its equipment as collateral.
The terms and conditions of an asset-based loan depend on the type and value of the assets offered as security.
Lenders prefer highly liquid collateral such as securities that can readily be converted to cash if the borrower defaults on the payments. Loans using physical assets are considered riskier, so the maximum loan will be considerably less than the book value of the assets. Interest rates charged vary widely, depending on the applicant's credit history, cash flow, and length of time doing business. working capital business financing start up loans for business