It is quite common for startup;s or established companies to raise money from lenders in order to run the operation effectively or for expansions. Some of the most common types of business loans categories into bank loan, SBA loans, invoice finance, online lending,and microloans. Each loan type is somewhat different from another in terms of factors such as loan limit, interest rates, collateral etc. It is always a hard step to take but is one of the most effective ways to raise funds using asset backed lending process.
Among different business loans, asset-based lending is becoming popular nowadays especially among small business. Generally, asset-backed lending allows companies to get loans using their assets. In simple words, if the company becomes unable to pay the loan amount back, their assets that were used as collateral will be taken by the lender. However, the best thing that asset-backed lending has to offer to the borrowers is that the loan is sanctioned not on the basis of the company’s credit rating but rather on the quality of the asset.
Matthew Ledvina is Managing Director at a London-based Fintech Company and has a special interest in business financing and loans. He plays a vital role in his company’s service of providing asset-backed lending.
What Makes Asset-Backed Lending a Good Financing Option?
Often times, companies have weak cash flows that declare their inability to apply for business loans.In such a situation, asset-backed lending becomes an ideal choice for companies. Additionally, there are numerous benefits that companies can get by borrowing money using their assets.
Asset-backed lending is a type of secured loan and has low-interest rates as compared to unsecured loans.Moreover, when there is a need to arrange capital in a short time for projects such as mergers and acquisition, asset-backed financing becomes the most practical option.
Low cost is yet another advantage, which makes it an affordable choice for raising funds.To be precise, the cost of issuing bonds and shares in capital markets are quite high as compared to arranging an asset-backed loan. A company simply needs to put its asset or assets as collateral for the loan and the lender after assessing the value of the asset issues a loan.
Generating Finance Using Traditional Asset-Backed Lending
Many companies approach the traditional services for getting an asset-backed loan. However, they are little different from the modern-day asset-backed lending in the way that the loans are usually held in a Special Purpose Vehicle (SPV). The assets are completely securitized, keep off-balance sheet and are kept within the SPV, which is a subsidiary company. The intention behind the creation of the SPV is to secure the obligations in case the parent company goes bankrupt.
With the world of internet creating new possibilities, it has become possible for lenders to provide loans to the companies using the forward flow agreement. There are online lending platforms that make loans for the companies and then sell the loans to the third-party (become the lender). It means that when a third-party buys a loan, the company borrowing the loan owes both the principal amount and the applicable interest to the third-party lender. However, the third-party has to pay compensation to the online platform for securing the loan. The compensation is usually made in the form of servicing fee, origination fee or excess income. The forward flow agreement is somewhat useful for investors in the way that it provides customization and optimization of the loan portfolio.
Asset-Backed Lending Beneficial to Lenders
Apart from offering a range of benefits to the borrowers, asset-backed lending is one of the best ways to lend money. The reason being the collateral, which may be inventory, accounts receivable, machinery and equipment that has high liquidity and it becomes easy to procure the debt amount in case the borrower becomes unable to make payments. Moreover, it is quite easy to issue loans to the borrowers and the process is also quite simple. However, it should be noticed that the asset-backed lending is available only in a few countries.
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