The global economy has suffered a huge blow from the COVID-19 pandemic. Needless to say, it gruesomely affected the lending activities too. There are certain business sectors that have constant demand for credit but other businesses are apprehensive of the future. In such times, one of the financial tools, asset-based lending is in high demand and there are obvious reasons behind it.
The asset-based loans predominantly focused upon the value of the borrower’s assets that would propose to them the cash flow required for operations. This became a very important financing product in having to restructure the market and resetting the business. Other forms of finances are overlooked because of how businesses can maximize their liquidity for immediate recovery and future growth with this tool.
How does the tool work?
The maximum amount of debt that a business can borrow is calculated based on the borrowing base. The borrowing base is in turn assessed based on the asset pool of the business. The loan agreement is proceeded by understanding the movement of the business, mechanics of their cash cycle. The loan amount decision is then taken through extensive negotiation by both parties. The decisions of repayment are taken and provisions are set to avoid insolvency situations.
Security and liquidity
The borrowers can have their business assets taken into as security and have ready availability of cash. Although the scenarios are not as easy as they sound. There goes a lot of calculation and assessment in understanding the reliability of the assets taken in and the funds are available depending on those calculations.
Lender control of assets
The lender has a lot more control over the assets than what the borrowers have. This leads to the development of certain negotiations regarding the following:
- Frequency of the reports of borrowing base to the lender
- The extent of the availability of financial information accessible by the lender
- The extent of cleaning down the outstanding loans to zero
Useful economic reviver
Every big and small business has faced the economic blow resulting from the global pandemic. They have been using this tool as their reviver combined with having financial leverage and marginal cash flows. With the globe surviving the blow, demands are rising and businesses are taking full benefit of ABL to increase their activities. This is helping them recover as much as possible.
Accord Financial asset based loans have been highly supportive to every small and large business requiring cash flow.