Asset Backed Loan
Asset-backed loans are a type of short-term business loan that’s secured by an asset, such as machinery, inventory, or receivables as collateral.
What is an Asset-Backed Loan?
An asset-backed loan is a unique short-term business loan where the borrower uses an asset they own as collateral to secure the loan.
The loan amount in an asset-based loan is frequently based on the appraised value of the asset, usually up to 70% of its total value.
This type of short-term business loan is beneficial for companies in need of cash but may have difficulty obtaining unsecured loans.
Example of Asset Backed Loan
Background
A leading manufacturer of agricultural equipment is a staple provider for local farmers for decades, offering a range of tractors, harvesters, and specialised machinery.
Challenge
The agriculture sector is rapidly evolving with the advent of automation and smart farming. To remain competitive, the company needed to invest in R&D (research and development) and launch a new line of smart machinery. However, their cash reserves were tied up in vast inventories and machinery equipment in their factories.
Solution
Understanding the intrinsic value of their assets and the potential growth from their planned R&D, the company sought an asset-backed loan, using their inventory assets as collateral. This provided the company with the liquidity they needed to continue investing in their smart machinery.
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