What checks do lenders perform before making an asset based loan
An asset based loan is a loan that lends an amount that will fluctuate based on the amount of certain assets, typically accounts receivable and inventory. Generally these loans are similar to lines of credits with balances that can fluctuate widely based upon the amount of assets held as well as based on the timing or seasonality of the business. If you need cash in a hurry, you should inquire about emergency business loans. Find out how your business can qualify.
Sometimes these are structured with overages that allow your company to borrow more seasonally and let small businesses obtain the financial flexibility needed to capitalize on opportunities in the marketplace. There is no one structure of an asset based loan for a small business that captures every possible contingency, but rather a variety of different loan options. However, lenders of asset based loans will commonly perform certain verification procedures on your business both initially and regularity to make sure that you are a good candidate for lending money to.
When making a loan that is asset based, the lender will typically perform certain checks on your assets to verify that not only they exist but also that they are of a specific quality. For receivables, confirmations will generally sent out for a sample of the balances that are included on your accounts receivable aging report to make sure that the sales existed and that the customer acknowledges that the amount you are indicating is owed to you is in fact real. This is particularly important for older receivables that are not collected during the time period in which they are due. Credit checks on these customers are sometimes performed to test for the collectibility of these receivables and past collection history is sometimes viewed.
Inventory is often checked on asset based loans and certain common ratios are sometimes calculated to see that the inventory that you are keeping turns over regularly. This ratio is particularly important for industries that have a high rate of change and that see the technology change rapidly which gives the company borrowing a higher risk of holding stale inventory that they will have to sell for less than its carrying value. Purchase reports are typically viewed and inventory aging reports are sometimes tracked to see the inventory that is not selling regularly.
Beyond that, a lender on an asset based loan may request audited or reviewed financial statements and may examine tax returns to see that they are being filed regularly and that the information included coincides with other financial reports. Checking this lowers the risk of undetected fraud occurring in the business as well as a lack of compliance with regulatory matters that can further limit the ability of a lender to recover funds. In this way, the checks performed by lenders on borrowers under asset based loans is similar to other loan types, but with a marked concentration on the quality and existence of the assets being lent against, particularly as their is an incentive to overstate these amounts.