What Are Asset Based Lenders? – Master of Accounting Degrees

Businesses often seek finance assistance from a lender, which has traditionally been a bank. However, within the past decades, many are inquiring, “What are asset based lenders?”. The loans these lenders provide differ from standard bank loans in a number of ways, but still provide practical liquidity to business owners. The article that follows will explore what asset based lenders do, how this lending option is different from traditionally structured loans, and what options it offers business owners.

In a Shifting Economic Climate

Many who wish to expand their small businesses are prompted to investigate the question, “What are asset based lenders?” While this type of lending was once considered the least desirable of borrowing options, today, it has gained significant popularity. Essentially, such loans are extended following an exhaustive review and evaluation of a company’s total assets. These can include inventory, contracts currently in play, and receivables. Unlike standard bank loans, which are static and based upon an initially determined loan sum, asset based loans can be modified over time. The lenders conduct additional reviews and may increase the credit line extended to their client based on business performance.

One matter of consideration is the underlying reason these types of loans have increased in popularity. Following the disastrous instability of the early 2000s, many entrepreneurs needed assistance to start a business, but lacked the track record or financial outlay the banks now required in order to secure a loan. Although it was an understandable reaction to the recent havoc created by unsound business practices, it hampered the very economic growth essential to extricate the national economy from the ruins. This is where asset based lenders come into the picture.

Practical Estimations

Rather than relying solely on the information provided by credit ratings, these lenders take a more practical approach. When a business solicits a loan, they conduct an audit of their current assets. From this investigation of the business’ current capital holdings, they then determine the initial terms of the loan.

When these private or non-bank-based lenders act with ethical philosophies, it can be a boon to businesses everywhere. In the last decade, as banks have tightened their lending policies and retreated from the active finance of small companies, these lenders have surged to the fore in popularity. This is due to the fact that the companies existing assets are used as collateral in order to secure loans. If the risk is heightened, so are the benefits for small or new companies.

However, business owners considering this type of loan should scrutinize prospective lenders with equal care. Because they are not bound by the same credit philosophies or federal regulations, there is a potential for questionable ethics in practice. Small business owners cannot afford to play fast and loose with their assets, for the same reason that traditional bank loans may be denied to them—they’re too new and too small.
In general, while many business owners may still seek traditional loans from banks, there are exceptions. Those industries that have a consistently healthy rate of receivables, such as manufacturing or distribution, factory-style production of consumables, and transportation generally have excellent success, and utilize these loans to expand their operations. The recent turmoil of the national and international economies has created opportunities for many, causing small businesses to ask, “What are asset based lenders?”