Asset Based Lending

 

This is a relatively new concept in trade finance.. Its principle use is in raising the maximum funds available on a company's balance sheet to finance a MBO/MBI acquisition, re-financing package or turnround situation.

 

The fixed assets on the balance sheet; ie, freehold/long lease property, plant and machinery etc., are all valued and used as security for a term loan of usually up to 5 years. This puts an element of fixed borrowing/cost into the package of funding with an option to repay the loan early. In addition the lender also makes available a stock finance facility and invoice financing of the sales ledger, which are revolving lines of credit with the flexibility of increasing the funding in line with budgeted growth in the business.

 

The overall effect is to provide a balance of different forms of lending with both fixed and variable lines of credit, alleviating or minimising the need for any clearing bank lending which is usually far more restrictive and expensive.

 

Also where EBITDA is strong in a business, lenders will sometimes provide a short-term loan on the basis of a company generating a strong cash flow, called 'cash flow lending'. This is high risk and more expensive than normal borrowing but it is effectively fresh air lending. More often however, a lender will use stock and a strong cash flow together as collateral for this type of loan generating additional funds.