Tactics of Asset Based Lending

Asset-based lending is something that has some interesting applications when it comes to doing business. For factoring companies looking to leverage their assets and do not mind taking some risks, this is another way to obtain some much needed capital. Although there are some obvious risks, it can cut down the risks in other areas, and can help float the company long enough to get some better funding available, as well as give the company a chance to get on some better footing.

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A mortgage is the best example of asset-based lending. This lending is based on the idea that someone puts up some real property in order to secure a loan. Should the person putting up the collateral default on the loan, he loses the property to the institution offering the loan. The money is customarily used to catch up with some debts or to finance some sort of investment. For companies that are facing some sort of dissolution anyway, this can be an excellent way to throw a Hail Mary: As the company is in a position where it is likely to have to start selling off its property anyway, and at a loss, this may represent a way to avoid that, as well as finance the company.

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Generally, there are some basic strategies that companies use to determine what is used as collateral. The property of the company is prioritized, with the property that is of the least use to the company given high priority to be used as collateral. However, like any other contract there is some negotiating that happens, and so it is likely that the lending institution is going to want property that has actual value; as the high-priority material is likely to not be used because it is out-of-date or in high need of repair, the institution is likely to want something of actual value and that needs to allowed for. The person seeking the loan needs to remember that you should never risk what you cannot afford to lose.

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In short, asset-based lending is a way to monetize property you are not using anyway. If you default on the loan, then you lose property you do not need anyway. However, keep in mind that the institution will inspect the potential collateral, as well as investigate whether or not the property is worth use as collateral; basically, it wants to make sure that it is not being used to help a company divest itself of property that cannot be sold if the company does default on the loan (if the property cannot be sold then it is effectively useless as collateral). Taking on a loan can be a great way to get some much needed capital, but bear in the mind that it carries the risk of losing property you may actually need.