Asset-based lending provides business owners with access to capital tied up in their A/R & Inventory. This option provides the company with more capital when they need it, as A/R and inventory balances increase. Traditional bank lenders may have significant problems with asset-based loans. Banks are constrained by both internal credit granting philosophies as well as federal regulations. Banks typically do not accept transactions with debt-to-worth ratios higher than four or five to one.
Once considered financing of last resort, asset-based lending and factoring have become popular choices for companies that do not have the credit rating or track record to qualify for more traditional types of financing.
By Robert A. Modansky, CPA/CFF and Jerome P. Massimino, CPA Journal of Accountancy
Asset-based lenders focus on the quality of collateral rather than on credit ratings. Borrowers pledge receivables, inventory and equipment as collateral. Traditional bank lenders may have significant problems with asset-based loans. Banks are constrained by both internal credit granting philosophies as well as federal regulations. Banks typically do not accept transactions with debt-to-worth ratios higher than four or five to one.