Lenders prefer highly liquid collateral such as securities that can readily be converted to cash if the borrower defaults on the payments. Loans using physical assets are considered riskier, so the maximum loan will be considerably less than the book value of the assets. Interest rates charged vary widely, depending on the applicant’s credit history, cash flow, and length ofThe terms and conditions of an asset-based loan depend on the type and value of the assets offered as security.

Lenders prefer highly liquid collateral such as securities that can readily be converted to cash if the borrower defaults on the payments. Loans using physical assets are considered riskier, so the maximum loan will be considerably less than the book value of the assets. Interest rates charged vary widely, depending on the applicant’s credit history, cash flow, and length of time doing business.

The most frequent users of asset-based borrowing are small and mid-sized companies that are stable and that have physical assets of value. However, larger corporations do use asset-based loans from time to time, usually to cover short-term cash needs.

An example of asset-based finance would be purchase order financing; this may be attractive to a company that has stretched its credit limits with vendors and has reached its lending capacity at the bank. The inability to finance raw materials to fill all orders would leave a company operating under capacity and could put the company at risk for closure.

Asset-based finance lenders tend to favor liquid collateral that can be easily turned into cash if a default on the loan occurs. Physical assets, like machinery, property, or even inventory, may be less desirable for lenders. When it comes to providing an asset-based loan, lenders prefer companies with not only strong assets but also well-balanced accounts.