Asset Based Financing

This comes in as alternative funding that has been obtained from commercial banks.

- Asset based financing is a way to finance business’s day to day needs or operations by
taking out a loan on accounts receivable for inventory which allows owners to pay for
expenses while the receivables are collected or inventory is sold off.
- There are 3 main assets that can be pledged
1. Recourse
Recourse loan is when a lender is able to seek financial damages to be paid in full if the
borrower defaults on the loan.
The liability is on the borrower as they have to find a way to pay back the loan in full.
Even if the value of the loans collateral declines, the lender can ask for more assets in
order to be paid in full. This one is less risky
Non-recourse loan is where the loan is secured by collateral however, if the borrower
defaults, the insurer or lender can cease the collateral but cannot seek out the borrower
for further compensation. The liability is on the lender as they would lose money if the
collateral does not make up the entire value of the financial liability.

With regards to asset based loans or lending, a recourse financing agreement would
advance funds up to 90% of eligible accounts receivables. Once the accounts receivables
have been collected, the lender pays back the difference net a fee for the service.

In a non-recourse agreement because a lender is taking on more risks, the advance is

between 70 to 80 % of eligible accounts receivables value. Once the accounts
receivables have been collected, the lender pays back the difference net a much higher
fee. This one is more beneficial to the borrower and not the lender.

Example
Consider a company that has a k1000 accounts receivable, the lender charges 5% fee for
the recourse agreement while the charge 15% fee for non-recourse agreement based on
advanced funds.
Recourse
90% of K1000 = 900,
For 20 days, fee 1000 – 900 =100 (this is the fee the lender will charge after 20 days)
5% (service charge) of 900 = 45
100-45=55 service charge to be paid to the borrower