Analysts predict the delivery of between 6,584 and 7,404 new private jets with a value of $217.5 and $236 billion in the next ten years. Yacht sales are up 11% to 15% in 2020. Despite challenging conditions, the US economy continues to grow.
Are you looking for the right financing option for your next jet, yacht, or high-end real estate purchase? Are you disappointed with what traditional lending is offering?
Whether you’re planning a purchase for business or personal use, asset-based finance could be the answer. Asset-based lending lets you use your assets to secure a loan or revolving line of credit. Find out what asset-based finance can give you that traditional financing can’t.
You’ll be ready to make an informed choice about the best financing for you.
How Does Asset-Based Finance Work?
Asset-based financing is a funding option for businesses and high net worth individuals. You can secure a loan or a revolving line of credit with assets like accounts receivable, inventory, equipment, or real estate. Personal assets can also be a source of short-term financing.
With asset-based loans, the outstanding balance is fixed. The term can be as short as a month or as long as several years. You’ll agree on a repayment plan with your lender.
A revolving line of credit typically has a term of one to three years. During the life of the agreement, you can borrow, repay, and re-borrow based on your assets.
An asset-based lender will complete a due diligence process before offering a loan or revolving credit line. The lender will calculate the value of the assets you want to use as collateral.
The lender will also ensure that you haven’t already pledged those assets to another lender. If you’re already using them with another lender, the first lender must agree to subordinate their position. The new lender will also verify that you or your business don’t have any serious legal, accounting, or tax issues that could affect your assets.
The asset-based lender will determine a borrowing base, which is the amount of money you can borrow. The borrowing base is usually a percentage of the value of the assets you pledged as collateral. The loan-to-value ratio depends on the type of asset you use.
Companies can usually borrow around 75% of the value of their accounts receivable. Some lenders will apply a graduated scale based on how old the accounts are. You can borrow more against a more recent account.
The borrowing base for inventory or equipment is often very conservative. You may have a borrowing base of 60% of the value of ready-to-go retail inventory. However, you may only be able to borrow 30% of the value of manufacturing inventory.
The determining factor is how quickly and for how much money the lender can liquidate the assets.
Who Can Benefit from Asset-Based Lending?
Stable small to medium-sized businesses with assets that they can use as collateral are typically the recipients of asset-based financing.
Companies use asset-based loans when they need working capital to operate or grow. Businesses that request asset-based financing frequently have a cash flow problem. However, rapid growth is often the source of the problematic cash flow.
Asset-based finance can help you refinance debt to improve cash flow. You can also use it to raise capital for business acquisitions. An asset-based lender helps you manage your growth and positions you for further expansion.
High net worth individuals also benefit from asset-based finance. For example, if unforeseen circumstances prevent you from repaying the loan, you won’t lose your primary residence or business as you might with a traditional financing arrangement.
Asset-based lending used to have a reputation as last-resort financing. However, it has become a popular choice for businesses and individuals who need an option outside of traditional lending. Total asset-based credit commitments in the US rose by 9.2% in 2019 to a value of $269.9 billion.
Whether you’re looking for asset-based finance for yourself or your business, it gives you several advantages over traditional lending.
One of the main advantages of private credit is that you can often qualify for asset-based loans even if you’ve had difficulty getting more traditional types of financing. Asset-based lenders look at the quality of your collateral instead of your credit rating.
Traditional bank lenders have restrictions from their own internal rules for lending as well as from federal regulations. Banks usually won’t accept a borrower with a debt-to-worth ratio larger than four or five to one. Asset-based lenders have more flexibility to offer financing to companies that are undercapitalized.
If your company has good financial statements, good reporting, inventory that sells easily, and customers who pay on time, you’re well-positioned for an asset-based loan.
Speed of Access
The process for getting asset-based financing is faster than for traditional loans or lines of credit. Depending on the type of conventional loan you apply for, you can wait months for the approval and closure. You can have the money from an asset-based loan within weeks.
Asset-based financing is more flexible than traditional lending options. Most asset-based finance options have few restrictions on how you spend the money. You need to use a business loan for business purposes, but otherwise you have freedom in how you use it.
The financing depends on the value of your accounts receivable or other assets. This means that as your assets grow, you can add them to your borrowing base.
The lender will usually approve increases to your loan or line of credit quickly. You don’t need to go through the entire underwriting process again. This advantage is especially beneficial for businesses that are expanding rapidly.
Fewer Loan Covenants
Asset-based loans usually have fewer covenants than conventional loans. Covenants specify the terms and conditions between the borrower and the lender. Fewer covenants makes it easier to manage the line of credit.
It’s easier to stay in compliance with the terms of the financing.
Costs of Asset-Based Finance
The total cost of an asset-based loan or line of credit will vary. Lenders can charge different interest rates, so shopping around is important. You may have to pay more if your company invoices less than a certain amount per month. Conversely, you may get a discount if you have other creditworthy factors like clients who pay on time.
The total cost of asset-based finance can be more than a traditional bank loan. However, asset-based lending is usually less expensive than other alternative financing options like factoring.
Finding the Right Asset-Based Lender
A final advantage of using asset-based finance is that you have the opportunity to work with a specialty lender. A lender with expertise in your industry or in the type of purchase you’re looking to finance has deeper knowledge and resources. They can more accurately determine asset values. They’ll work with you to find the best solution for your situation.
Shearwater Aero Capital is a finance company that specializes in aircraft, aviation equipment, yachts, and premium real estate. We work with clients around the globe. We’ll work with you to structure a financing deal with the best terms possible.
Contact us today to start exploring your financing solution.