Terms: Asset Based Business Lines of Credit

An asset based business line of credit is usually designed for the same purpose as a normal business line of credit - to allow the company to bridge itself between the timing of cashflows of payments it receives and expenses. The primary timing issue involves what are known as accounts receivables - the delay between selling something to a customer and receiving payment for it. A non asset based line of credit will have a credit limit set on account opening by the accounts receivables size, to ensure that it is used for the correct purpose. An asset based line of credit however, will generally have a credit limit that fluctuates based on the actual accounts receivables balances that the company has on an ongoing basis. This requires the lender to monitor and audit the company to evaluate the accounts receivables size, but also allows for larger limit lines of credits, and can allow companies to borrow that normally would not be able to. Finally, an asset based line of credit charges an interest rate high enough and has other terms which generally allow the lender to profitably collect the money owed to the company should the company default on payments to the lender. The most extreme form of an asset based line of credit is known as factoring, where the company sells off its receivables so that now its customers owe the lender. The lender mitigates its risk by controlling who the company does business with to make sure that the company's customers can actually pay.
Lines of credits to even riskier companies may require that the company deposit all of its funds into a "blocked" account. The lender then approves any withdrawals from that account by the company and controls when the company pays down the line of credit balance.

For more information, David J. Lacasse can be reached at healthcarecollateralconsulting@gmail.com or (203) 610-2515.