Asset Based Commercial Loans

Asset based commercial loans are loans that are secured by an asset. This means that if, for any reason, the loan is not repaid, the asset is taken in exchange. A good example of this is a mortgage taken out for the purchase of a home; the home is the asset that secures the mortgage. Should the monthly mortgage installments not be paid for a period of time, the lender has the right to repossess the home in compensation and sell it to recover the money originally lent. While the purchase of a home and the mortgage can help to describe the mechanism, asset based commercial loans have certain differences.

Lending to businesses and large corporations
When businesses and large corporations need to take out an asset based loan, they will need to exchange guarantees to secure the loan. Essentially, these are based on assets inside the company that cannot be easily turned into cash; the reasons for taking out asset based loans are varied. Asset based loans are particularly useful to fund the take over of a company, or the business wishes to acquire or to fund an increase in production, due to increase demand for the company’s products.

Asset based loans for takeover
Lenders are particularly interested in this type of request for an asset based loan. In many cases the loan can be guaranteed by giving the lender a number of shares in the company making the purchase. These will sometimes dip in value during the acquisition and then rise after the successful purchase has been made. A more popular option that lenders have tended to prefer is to agree that the purchasing company buys shares in the company it intends to acquire and use them as a guarantee for the lender. The resulting increase in value is taken by the lender as their interest on the loan. The lender in this type of scenario will want to have a tight working relationship with the company borrowing the money to make sure their take over decision makes sense and the chances of strengthening the company’s financial standing are good.

Asset based loans for expansion
Asset based loans for expansion can use a series of items not normally used as security to raise finance. These items can include inventory, accounts receivable, machinery and equipment. In certain cases, rights to trademarks and copyrights can be used to secure asset based loans. For example, a software company with a popular computer game used the games intellectual property rights to secure an asset based loan. If it was unable to repay the loan, the intellectual property rights to the game would pass to the bank who provided the loan and they could be at liberty to sell the game, source code and intellectual property rights to the highest bidding third party.

Asset based loans: A strategy as your last resort?
In many cases this is the situation, once all the normal avenues of raising cash have been exhausted such as raising finance on the capital markets by selling bonds to investors. This method of loan is taken when an unsecured loan or mortgage from the bank is not an available option, then an asset based loan must be considered. Normally, it would be possible to use buildings the business owns as security, however if these are already mortgaged, this option is not available. So an asset based loan is the only option if finance is needed when the company is in real difficulty. Asset based loans are very similar in nature to sub prime loans, and like these loans, the interest charged on the loan will be high. Asset based loans are very often used by parent companies to finance their subsidiaries. In fact, some banks have made more money charging interest to their subsidiaries than they have from their normal day to day interest and fee based services.

Asset based lending has become such a core business to many lending companies that CEOs of financial institutions state that without this income from corporate customers through high interest, the financial institution itself would be at a risk of collapse. Low interest rates in both the bank and bond market have meant that lending money in the normal markets is, at best, marginally attractive and at worst not profitable, neither for banks, or investors in return for bonds.