State turning to asset based lending

A financing decision that the State of California is in the process of making is the perfect model of how asset based lending can be used. The State of California needs money to run their organization (sound familiar business owners?). However the State is not in a good position to take on more debt. In their case it is because they already have a great deal of debt but in the case of business owners, they may be too small, too young or perceived as “too risky” to borrow. However the State of California has an asset, in their case office buildings, that they are considering using as collateral in a ‘sale lease-back’ arrangement so that they can make use of the cash value of the asset while still maintaining use of the property. This is the prototypical model for asset based lending. Let me break it down further.

Asset based lending is generally (but not always) utilized as an alternative to less expensive bank loans simply because  asset based funds tend to be more expensive. If it is truly used as an alternative, or in other words, bank loans are not available then asset based lending is a great avenue to gain access to the vital capital needed to maintain or grow business operations.

In the case of the State of California, they have an asset in the form of office buildings that have been valued at as much as $2 billion and they would like to use that money for operations. However, California would also like to maintain use of the property. For this situation, a financial tool called a “sale lease-back” is what California is considering utilizing. In a ‘Sale lease-back” California would sell the building to a financial institution for a lump sum of, lets say $2 billion. The financial institution then leases the property back to the State of California. This allows the State to access the equity in the building while still maintaining use of the asset.

Businesses can use similar tactics to gain access to capital even without a balance sheet full of large assets. Purchase orders, accounts receivables, and inventory are all assets that can be used as collateral to gain access to capital.

The main advantage to asset based lending is that it is widely accessible to businesses in all types of credit situations. Whether it is a new business with no credit, or a business that has had credit issues in the past, asset based lenders can almost always make the situation work. As well, this lending situation will allow these businesses to a build credit history that they can use to qualify for different types of financing in the future.

Factoring, PO financing, inventory finance, equipment finance, sale lease-back, merchant cash advance are a few of the many options for financing that are widely available to companies that fit their lending model.