With the hectic pace of Indian business today, companies desire to obtain flexible business loans that best fit the business requirements. One such loan product is an asset based loan where the assets of the borrower are utilized as collateral to raise funds. The product is gaining popularity with Indian companies as it doesn’t need the dilution of equity in order to take advantage of instant liquidity. But with each financially successful product comes some pluses and minuses that are associated with it which must be balanced very carefully.

This is indicating the pros and cons of a business assets based loan, discussing what kind of asset based loans are easily available in India. The businessmen will then be able to make appropriate decisions based on their financial objectives once these parameters are specified.

What is an asset based loan

Asset based loan is one form of lending where a firm gives a loan by securitizing their assets. Assets employed may be inventory, accounts receivable, machinery, or real estate. Unlike loans given in terms of credit rating or income for the sake of providing it, asset based loans pay significantly more attention to how valuable the collateral is.

Such type of loans support working capital shortfall or finance business expansion. Indian banks and non-banking finance companies (NBFCs) provide such type of loans, estimating the asset value to arrive at the quantum of loan. Quantum of loan usually varies between 60% and 80% of the value of the asset.

Types of asset based loans in India

Asset based loan forms are popularly known to make it convenient for business companies to select the right one. The types of asset based loans available in India include the following traditional ones:

Loans against inventory

Inventory financing enables companies to borrow from inventory. It assists companies in financing seasonality or cash cycle of growth.

Loans against receivables

Factoring is also referred to as loans against receivables. Loans against receivables is a facility of loan secured by accounts receivables. Lenders offer finance against bills due for payment in order to mobilize working capital money forthwith.

Loans against machinery and equipment

The company is able to obtain loans by collateralizing heavy machinery or equipment. It is appropriate for manufacturing or production companies with a high capital expenditure outlay.

Loans against property

Borrowing against real or commercial property to raise money is standard for companies with valuable real assets. Tenors are long and interest costs are negligible.

Loans against securities

Businesses can provide financial securities like shares, mutual fund units, or government securities against a loan. It is a strategy that provides cold cash without parting with investments.

Advantages of availing of an asset-based loan for business

Spontaneity of money

Asset based loan is also one of the biggest advantages in terms of relatively faster approval and disbursal as against the case of unsecured loans. As the loan is secured by physical assets, the lenders are less exposed to risk, and the mechanism is easier.

Flexibility of use

Amounts received under the name of asset based loans can be utilized for any general corporate purpose, i.e., working capital requirements, acquisition of inventories, or expansion. No restriction is put by the companies on the utilization of the amount, and hence the appeal of the loan rises even more.

Low interest charges

This credit is less expensive in terms of cost of interest as it is backed by collateral, which acts as a promise to repay the loan. Indian firms can apply it to reduce their cost of borrowing.

Better working capital management

Asset-financing loans provides for smooth cash flow, a necessary condition for business operations. Firms can control receivable-payable deficits.

Ability to accept bigger credit limits

Since the loan value is secured on asset value, better collateral companies are able to take bigger credit facilities than unsecured loans.

Weaknesses in obtaining an asset based loan to business

Loss of asset

Loss of control over pledged assets in the event of default by the borrower is the greatest risk. This can be humiliating for business, especially where the assets are worth business assets.

Long process of appraisal

Even where disbursal is faster, initial valuing and validation of assets can be tedious and time-consuming with lots of paperwork. Misvaluation of assets can lower loan worthiness.

Hidden fees

Charges for asset inspection, attorney fees, or insurance fees can be imposed. These can lead to increased cost of borrowing.

The size of the loan is typically determined by the market value of the asset, which keeps changing. The volatility would impact the credit limit over a time period.

Not always appropriate for small business

Business persons with negligible or no assets may not qualify for asset-based loans. This is not stimulating utilization by routine businesses.

Things to consider before buying an asset-based loan

Prior to getting transformed into an asset-based loan, Indian companies ought to consider the following to not overextend themselves financially:

• Asset quality and valuation: Ensure the assets to be put up as collateral are adequately documented, are lawfully owned, and adequately valued.
  
• Interest rate and fees: Compare shop by obtaining quotes from more than one lender—banks and NBFCs—to secure the most favorably priced offer.
  
• Loan tenor and repayment: Select a repayment term that considers your business cash flows so as not to disrupt working capital.
  
• Operational implication: Refrain from collateralizing key operating assets and therefore risk endangering business continuity on default.
  
• Legal and compliance requirements: Compare regulatory and documentation requirements in place with asset-based lending.
  

Accurate valuation of the assets goes to guard your company, maintain the costs of debt servicing at the lowest levels, and guarantee long-term monetary wealth through asset-backed finance facilities.

Deriving full benefit from asset-based loans

In order to derive full benefit from asset-based finance, businesses will have to subscribe to sensible finance practices and active management:

• Maintain up-to-date asset registers: Keep your asset register up-to-date in an effort to facilitate swift and accurate valuations.
  
• Pay arrears dues: Retire any overdue payments or liens on collateral property to preclude sanction delays.
  
• Obey loan use: Use borrowed money accordingly and frugally to maintain fiscal responsibility and relish a good credit history.
  
• Choose experienced lenders: Transact with experienced financial institutions that are conversant in asset-backed loan deals for smooth handling.
  

Being transparent and systematic in handling assets and loan proceeds, and increasing the likelihood of obtaining good loan terms, reduces the probability of default. It ensures effective utilization of capital with assets protection.

Conclusion

Asset-based finance is an excellent source of funds for Indian businesses in pursuit of flexible and low-cost funds. Financing against tangible assets such as inventory, receivables, or machinery enables businesses to access working capital in order to pursue growth. But being cautious towards gains and pitfalls, for example, asset seizure risks and valuation issues, is imperative prior to making the jump.

The different forms of asset based loans are customized to meet the specific solutions based on business needs and asset base. Businesses need to start strong due diligence and long term implications so that this source of funding serves best to their strategy needs. Asset based lending, if utilized in a responsible manner, can do a great deal in making the Indian business scenario financially strong and healthy.