An asset-based line of credit is a type of working capital line extended by financial institutions, commonly suited for businesses seeking larger credit facilities. It enables these businesses to borrow money based on the assessed value of their qualifying assets. These assets typically encompass items like accounts receivable and inventory.

Asset-based lines of credit are particularly advantageous for businesses with valuable assets that can serve as collateral. They provide an alternate funding avenue for companies that might not meet the criteria for conventional loans due to credit considerations. Moreover, asset-based lines of credit help businesses handle fluctuations in cash flow and seize growth opportunities without tying up their working capital.

Here’s how an asset-based line of credit generally works:

1. Asset Evaluation: The lender assesses the value of the business’s eligible assets, such as outstanding invoices (accounts receivable) and inventory. The total value of these assets determines the maximum credit limit the business can access.
   
   
2. Credit Limit: The lender establishes a credit limit, which is a portion of the total asset value. This credit limit represents the maximum amount of funds the business can borrow using the asset-based line of credit.
   
   
3. Borrowing: As the business needs funds, it can borrow against its eligible assets up to the established credit limit. This provides the business with flexibility to access funds when necessary.
   
   
4. Repayment: The borrowed funds need to be repaid within a specified time frame, typically short-term. Interest payments are typically required to be made monthly.
   
   
5. Interest and Fees: Interest is charged only on the amount of funds actually borrowed, not on the entire credit limit. The lender may also charge fees related to the maintenance of the line of credit and the borrowing process.
   
   
6. Asset Monitoring: The lender may periodically monitor the value of the pledged assets to ensure they maintain the required collateral coverage.
   
   
7. Renewal: Asset-based lines of credit are often renewable, allowing the business to continue borrowing against eligible assets as long as they meet the lender’s criteria.

Field Audit Requirement:

Lender will often require a filed audit performed by a third party to validate account receivable and inventory levels as well as evaluate the effectiveness of internal policies and processes.