Asset Based Lending
Asset-based lending has become very popular over the past 10 years given that it is a low-risk form of investment for many financial institutions. There are a number of different businesses that are very heavily asset focused including real estate businesses, retail companies, automotive businesses, and other enterprises that are actively engaged with the buying and selling of actual tangible goods or property. Most lenders are very receptive to providing capital for these types of businesses given that they are able to almost fully collateralize their loan with the assets that are being purchased. As such, many businesses that are in the startup phase of their operation are able to receive a significant amount of capital support from a bank, credit union, or similar financial institution given that this is considered a low-risk form of lending for these companies. Of course, a business plan is going to still be required given that these companies are
going to want to see the types of assets being purchased and sold on an ongoing basis.
This business plan should be a comprehensive document that follows a three-year to five year time frame in order to showcase exactly how these funds will be used as the principal balance is being paid down. The interest rates that are associated with asset-based lending are typically lower than that of a company that may need just a working capital line credit in order to develop or expand their operations.
There are a number of independent asset-based lenders that operate not in the capacity of a bank or traditional financial institution. These lenders often acquire a large-scale line of credit and in turn provide loans to individuals who are looking to purchase specific types of assets. These types of lenders are very popular among automotive lenders as well as companies that engage in the buying, rehabilitation, and sale of real estate. Given again the low-risk nature of this type of lending – a number of independent agents have entered the market with these types of financial products. These companies typically make their money not only from the interest charged on an ongoing basis, but also from upfront fees that are associated with originating loan.
Of course, a certified public accountant should always be brought into the loop when determining whether or not these types of debt instruments are appropriate for any specific type of business venture. Most importantly, the CPA can also provide the entrepreneur with a depreciation schedule in order to make sure that the tax consequences and tax liabilities associated with buying and selling the assets using an asset-based loan are appropriate even with the entrepreneur is seeking to accomplish. The CPA should always be involved with any major business decision as it will provide a significant amount of insight as to the day-to-day operations of any business and any tax liabilities that may be accruing due to entrepreneurial activities.
For startup business – an asset-based loan may be the way to go given the relative ease in which they can be acquired. Additionally, many asset-based lenders will provide capital against an established asset such as a home in order to provide capital for startup business that is not necessarily going to be doing a lot of trading in tangible goods. Other alternatives include using a home-equity line of credit in order to fund entrepreneurial ventures, but this does come with some risk.