Top Tips for Asset Backed Loans
ADS’s guide for asset backed loans is when business finance is secured against tangible assets (PP&E) of the entity. This can include motor vehicles, heavy machinery, inventory or any other assets that have a secondary market for sales.
The Process for Securing an Asset Backed Loan
Step 1:
The key focus of alternative lenders who provide asset backed loan solutions is the value of those assets in the secondary market. This is especially the case in the event there is possible default by the borrower and the lender is forced to take possession of those assets and therefore, sell them to recover the loan. The more liquid the secondary market is for the assets, the more comfortable private lenders typically are in providing finance against those assets at higher LVRs. Initially any private lender who issues indicative loan terms believe that on the down-side their loan is sufficiently collaterally covered with the assets of the business. The borrower is typically required to pay for upfront due diligence costs like the commissioning of a third party valuation report to confirm the value of the business assets.
Step 2:
Once the valuation report is completed the lender typically reaffirms terms and what LVR they are willing to provide on the pledged assets by issuing a binding offer of finance. If the borrower is happy with the loan terms, the lender requests them for legal fees to have loan documents issued.
Step 3:
The lender and borrower agree on a settlement date for funds to be advanced. Upon settlement the lenders legal team typically registers the lenders interest in the assets of the company in the PPSR register.
What to be Aware of in Asset Backed Loans
1. Default costs and Exit fees
Often borrowers who utilise asset backed loans from private lenders may have cash flow issues that have made them ineligible for finance from traditional banks. There are some alternative lenders who have punitive default interest fees which can eat into any remaining equity of the borrower’s assets before an insolvency event. Borrowers should carefully check the default triggers in the loan documents and have reasonable cure mechanisms to give them time to address the default or refinance that particular private lender without excessive fees and charges levied.
2. Pledging all assets
Some asset backed lenders in the private lending market may place charges over all the borrower’s assets even if they are not financing against those particular assets. One common floating asset is the receivables of the business which other specialised receivables finance providers can finance against, but may be stopped if the borrower has already pledged those assets to an asset backed lender who really is not providing any additional funding against those asset backed facilities. It is important that the borrower carefully structures the security package available to the lender to ensure they have sufficient flexibility and allow other financiers opportunities in if required in the future.
3. Track-record of lender
Borrowers should ask the lender to speak with some of their past borrowers to check their experience. There are some asset backed lenders who have a higher than normal rate of borrower default and insolvency. Some of these lenders make more on their facility when there is a borrower default then under normal repayment terms. These lenders should be avoided as they are indifferent or sometimes inclined to provide loans where they know the borrower will likely default on the facility.
Other Areas of Interest
- Find out more about private lending tips
- Explore ADS’s asset backed loan transactions
- Apply for an asset backed loan