Asset Based Loans

Asset based loans are simply loans secured by assets. The assets of a business include cash on hand, any investments on the books, accounts receivable, inventory, equipment and property. However, the term “asset based lending” commonly refers to secured business loans where the business collateral securing the loan does not include property (real estate). The assets used to secure a business loan are referred to as the “borrowing base” because they are the assets on which the loan is based, in other words, the lender is relying on the value of these assets to reduce the loan’s credit risk. To further reduce risk, lenders apply an “advance rate” to the borrowing base, which is essentially the maximum percentage of the borrowing base that the loan amount can equal at any time. For example, if a business has a borrowing base of $1,000,000 and the lender’s advance rate is 70%, then the loan balance can never exceed $700,000. In addition, the borrowing base is usually not fixed for the life of the loan. Instead, lenders usually recalculate a company’s borrowing base quite regularly. If the borrowing base drops far enough that the amount outstanding under the loan exceeds the advance rate (as applied to the recalculated borrowing base), the loan agreement typically has provisions permitting the lender to demand repayment of any amount necessary to bring the loan balance down to the eligible amount. Rates on asset based loans are usually tied to the prime lending rate or to LIBOR. Prime is the quoted rate at which banks will offer short-term credit to their best non-bank borrowers. LIBOR is an acronym for London Interbank Offered Rate, meaning the rate at which major banks in London are willing to lend Eurodollars to each other. By tying a loan’s interest rate to either of these reference rates.