December 7th, 2010 
Sara Turner 
Usually, asset based loan have strict loan-to-value limits. These vary from lender to lender and depend on the type security. Indicatively, lenders may limit a loan to somewhere from 50% to 70% of the appraised value of the asset taken as security. For example, if the asset has an appraised value of $1.0 million, the asset based lender may lend up to $0.7 million against that asset. The precise meaning of the term appraised value is important.
Conventional lenders usually take the existing market price of an asset as its appraised value. Asset based lenders, by contrast, may consider appraised value to be best seen as the fundamental value. In these cases, asset based finance options can be attractive even for high quality borrowers. This point is highlighted in the example below.
Conventional lenders usually base a loan amount on the price at which an asset is being purchased rather than the underlying fundamental value of that asset. This can be unattractive for a borrower if the underlying fundamental value of the asset is significantly above the current market price. In these instances, conventional loans based on the current market price of an asset can penalize a borrower that has an opportunity to acquire and asset at a deep discount to its true fundamental value. Consider the following specifics.
An experienced property investor has identified an opportunity to acquire commercial real estate for $20.0 million as a distressed sale from a forced seller. The investor calculates this price to represent a discount of $16.0 million versus a $36 million fundamental property value.
The investor has $2.0 million to allocate to the purchase. He makes an approach to a bank for a conventional property mortgage loan to acquire the asset using it as collateral. The bank refuses the loan stating it requires the investor to contribute a minimum 30% or $6.0 million as equity to the property. Bank policy is to limit exposure in any single property to no more than 70%.
For higher-risk borrowers, asset based lenders may require the granted line of credit be established as a blocked account necessitating approvals by the lender before withdrawals can be made. This stipulation provides the lender with tight control over the funds and allows it to closely review their deployment.
The investor next takes the same loan proposal to a dedicated asset based lender. This lender completes its due diligence investigation of the property, including commissioning a thorough analysis of its fundamental valuation by an independent expert. The asset based lender concludes its appraised value of the property is nearer to $36.0 million, not the $20.0 million purchase price. On this basis, it concludes the equity contribution by the borrower to be $2.0 million + $16.0 million = $18 million or 50% of the appraised value, well above the 30% minimum it requires. The asset based lender therefore approves an $18.0 million loan for the investor to complete the purchase.
In conclusion, accounts receivable financing are a convenient form of financing for many borrowers. Like most loans, may involve set-up fees, ongoing administration fees and break fees. However, these fees are typically a small fraction of the total value of the loan. They are usually structured with a single asset category used as security, but multiple categories may be also be used. The loan period is usually fixed short or medium term.
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