Banks base their lending decisions on one overriding question. Will the borrower be able to make honour the repayments.
If they decide the risk of default is too great then the answer will be no.
But that’s not the end of the road. If you can’t get an unsecured term loan or an overdraft that provides sufficient working capital, you may be able to persuade a bank or specialist lender to advance money against your assets. This is asset based finance.
WHAT DOES ASSET BASED LENDING INVOLVE?
There are a number of ways to do this. If you own property or valuable machinery you can put it up as collateral – a move that should also result in slightly lower interest rate than would be payable on an unsecured loan. Be aware though that in assessing suitability for asset based lending, providers are looking for something more than an office full of computers. They want goods with a clear second hand value, such as cars, forklifts, plant or property. Expect to pay 1% to 1.2% over base rates for this kind of loan.
If you own saleable property or plant, you may be able to take advantage of asset based lending by borrowing against the value of your intellectual property. Banks are wary of this as the value of intellectual property is uncertain. However, if third parties have signed an agreement to use your brand or products then the IP has a measurable value and is a possible candidate for an asset based lending arrangement.
DEBTOR BOOKS
Alternatively, you could sell your equipment to a finance company and then lease it back. The result will be a lump sum that can be used as working capital, with the repayment taking the form of monthly rental payment to the leasing company over an agreed period.
The final area to look at is your debtor book. Invoice discounting and invoice factoring are part of the asset based finance lending universe and provide a means to realise money owing from customers as soon as you raise an invoice. Interest rates vary from 1.5% to 3% over base and there will be a management fee. In return it will take a fee based on the value of the invoices. In the case of factoring the lender will also chase your debtors for payment. With invoice discounting you remain in charge of your credit control.
NEXT STEPS
For more information on asset based lending contact your business banker or the Factors and Discounters Association or visit its website at www.fda.org.uk.
