Asset-backed lending for small businesses allows you to utilize a variety of collateral options to improve business cash flow. Although there is a long list of collateral options that can be used, there are some that are weighted more heavily than others.
Accounts Receivable (A/R) – Once services have been rendered and a sale is official, an invoice is created and sent to customers. For a majority of asset loans, the accounts receivable of a business are the primary asset that secures the asset-based line of credit or asset-backed term loan. The LTV or loan-to-value can vary, but average advance rates are 90% of the invoice amount. There are numerous items that affect the advance rate on an invoice. Some of these variables are the time it takes a customer to pay, the payment terms that the product is sold on, the credit strength of each customer, and the concentration or diversification of your customer base.
Inventory – Inventory is a core asset that can be used when looking to collateralize an asset-based loan to improve cash flow. It’s common that business owners will value inventory at retail, but any asset-based lender will look to understand what they can sell inventory for in the event of a default. The advance rate on inventory ranges depending on a variety of factors. Some of those factors include the location of where inventory is stored, the type of goods, and how easily inventory can be sold if needed. It’s also important for companies to have a perpetual inventory system to monitor inventory levels.
Purchase Orders – A common asset used in asset-backed finance is purchase orders or POs. When a customer places an order, they issue a PO, which outlines the order. The purchase order will show the order date, when goods are to be shipped, the quantity, price per unit, etc. When a PO is received by a seller, an asset-based lender will review the terms to understand who the customer is, the creditworthiness, and the value of the PO. The loan to value for purchase order financing ranges between thirty to forty percent and as soon as the goods are shipped and an invoice is created, the additional availability will be released.
Machinery and Equipment – Considered a hard asset, machinery and equipment are favorable assets for assed-based lenders. By taking the make, model, year, and the condition of the equipment a lender will have the ability to assign a value to the equipment. The typical advance rates or LTV assigned to equipment and machinery is 60% of the FLV or forced liquidation value. This means that the lender will provide availability based on what they would be able to sell the equipment for in the event of a default.
Commercial Real Estate – Although commercial real estate or CRE is a hard asset and a great form of collateral, it’s not as liquid as equipment, A/R, or inventory. In most cases CRE will be used as an additional asset to provide added liquidity on an asset-based facility, rather than the primary asset used to secure the loan. For example, if you were looking to borrow $5,000,000 from an asset-based lender and only had enough A/R and Inventory to get to $4,000,000, an asset-based lender would look toward your commercial real estate as collateral to provide you with the additional $1,000,000 of availability.
Marketable Securities – Although not a core asset for asset based lending, marketable securities can be used as boot collateral. Securities are often highly liquid and provide lenders with collateral that can easily liquidated. Some examples are bonds. certificates of deposits (CD), or publicly traded stocks. Advance rates range depending on the strength of the security and can be anywhere from 50% to 95% of market value.
Intellectual Property – IP is another asset that can be used in a borrowing base calculation but is very seldom used as standalone collateral. Since IP is an intangible asset, it’s very difficult to truly assign value to it, which means it can be used to help an asset-based lender provide a marginal increase of liquidity, but will never make up a substantial portion of the collateral base.
