Self liquidating asset implies that
"Asset-based lenders deduct ineligible receivables such as those from mom-and-pop shops, those from customers who have had a bad debt on prior receivables, ones that are more than 90 days old or, perhaps, receivables due from customers overseas," says Barnett.So on the receivables side, the equation looks like this: The same concept applies to inventory.The asset-based lender is taking a so-called security position in the underlying assets and views liquidation of them as a viable means of recovering the loan principal.In addition, because the asset-based lender is lending against assets, which can rapidly fluctuate in value, it monitors these assets more intensively.This is the fundamental idea behind so-called asset-based loans--a potent source of funding for established small businesses, according to William Barnett, an attorney with the law firm Herrick, Feinstein LLP in New York City who specializes in asset-based lending.Specifically, he says, "Asset-based lending is formula lending based on the liquidation value of accounts receivable and inventory."While lenders making term loans (loans that are paid back over a span of two to five years) certainly consider the value of these assets, value is only a secondary consideration.They, too, look at cash flow, but they also look at two asset classes--accounts receivable and inventory--in terms of their ability to be liquidated to pay off the loan if the cash flow goes south.Short-term asset-based loans generally get paid off as accounts receivable and inventory liquidate.
The receivable, really a debt owed to the company, is usually repaid in 10, 15, 30 or 45 days. The lender makes a loan to the company based on the value of the receivables, typically advancing 80 percent of eligible receivables.
For the most part, when a banker makes a term loan, he or she is looking at the cash flow of the enterprise and trying to determine whether it is sufficient to service the debt and whether it can be sustained for the term of the loan.
Asset-based lenders, on the other hand, have a dual focus.
This can be a good thing because it gives a company time to catch its breath. If an asset-based loan isn't renewed by the lender, for example, the company may be forced to pay the borrowed money back before it's prepared to do so.
An asset-based lender's emphasis on assets rather than cash flow makes a significant impact on the relationship between lender and borrower, according to Barnett.
Search for self liquidating asset implies that:
Ineligible inventory might include items that are obsolete, certain exotic goods that would be difficult to liquidate, perishables that may spoil before they can be liquidated or materials that are damaged.