In the competitive and fast-paced business environment of India, access to timely and adequate capital remains critical for sustained growth. Traditional loans often fall short due to stringent credit requirements or long approval processes. This challenge has brought asset based loans into sharp focus as an effective financial instrument, enabling businesses to unlock liquidity using their existing assets. This article delves into how an asset based loan can help businesses access capital efficiently, explores the types of asset based loans prevalent in India, and outlines their distinct advantages.
Understanding asset based loan
An asset based loan is a form of financing where businesses can obtain funds by pledging their tangible or intangible assets as collateral. Unlike conventional loans that emphasise creditworthiness and cash flow, asset based loans primarily consider the value of assets such as inventory, accounts receivables, machinery, or real estate. Financial institutions lend a percentage of the asset’s value, providing companies with quicker access to working capital.
In the context of Indian businesses, especially Small and Medium Enterprises (SMEs), asset based loans offer a viable alternative to constrained bank credit. With growing economic activity and increasing capital requirements, these loans bridge the finance gap by leveraging corporate assets efficiently.
How asset based loans help businesses access capital efficiently
1. Faster approval and disbursal process
One of the key advantages of an asset based loan is the speed of approval. Since the lending decision is asset-driven rather than solely focusing on credit history, banks and NBFCs can process applications with reduced paperwork. This translates to faster capital infusion, which Indian businesses can crucially utilise for inventory purchase, equipment upgrades, or meeting operational expenses.
2. Flexible borrowing limits
Asset based loans provide flexible borrowing limits linked to the value and liquidity of the underlying assets. This is markedly helpful to businesses experiencing fluctuating working capital requirements. For example, a company with high receivables during peak seasons can borrow more, ensuring continuity and smooth operations without applying for fresh loans each time.
3. Enables growth without diluting ownership
Traditional equity financing may lead to the dilution of business ownership, but asset based loans allow companies to raise capital without relinquishing control. This is particularly beneficial for family-owned or closely held Indian enterprises preferring to maintain managerial authority.
4. Improves cash flow management
By converting assets into liquid funds, businesses can better manage their cash flow cycles. Smooth cash flow ensures timely payment to suppliers, employee salaries, and other operational expenses critical to sustaining competitiveness in sectors like manufacturing, retail, and services.
5. Suitable for businesses with limited credit history
Start-ups and new ventures often struggle to avail bank financing due to inadequate credit history. However, asset based loans assess collateral value instead of conventional credit scores. This provision widens access to finance for emerging Indian companies with valuable assets.
Types of asset based loans in India
Understanding the types of asset based loans enables businesses to select the most appropriate solution that aligns with their asset base and capital requirements.
1. Loan against receivables (accounts receivable financing)
This is a common form of asset based loan where companies pledge their outstanding invoices or receivables. Financial institutions advance a certain percentage (usually 70-90%) of the invoice value, which companies repay when customers settle their dues. This type is ideal for businesses with strong creditworthy customers but delayed payment cycles.
2. Loan against inventory
Inventory financing allows businesses to secure loans against stock such as finished goods, raw materials, or work-in-progress. The lender assesses the market value of inventory and offers funds accordingly. This type is beneficial for manufacturers and traders who need working capital tied up in inventory.
3. Loan against machinery and equipment
Companies that own machinery or equipment can obtain loans by pledging these fixed assets. The loan amount depends on the asset’s used value and condition. This type helps in upgrading or purchasing new machinery without impacting daily cash flow.
4. Loan against property (commercial or industrial)
Commercial real estate such as factories, warehouses, or office buildings can serve as collateral for asset based loans. Loans against property typically offer higher borrowing limits and longer tenures, suitable for businesses aiming at expansion or capital-intensive projects.
5. Loan against securities
Some lenders provide loans against listed securities like shares and mutual funds held by the business or promoters. This type provides a quick liquidity source but depends on market conditions and is subject to regulatory guidelines.
Considerations when opting for an asset based loan
While asset based loans provide multiple benefits, businesses should carefully evaluate factors such as:
- Asset valuation methodologies adopted by lenders.
- Interest rates and fee structures, which may be higher than traditional loans due to the higher risk.
- Repayment terms in relation to cash flow cycles.
- Impact on future borrowing capacity as assets are pledged and cannot be used for additional loans.
- Legal and documentation requirements for asset transfer or hypothecation.
Government initiatives supporting asset based financing
Recognising the importance of SME growth and capital access, the Indian government has introduced various schemes facilitating asset based finance. For instance, the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) reduces lender risk, thereby encouraging banks to extend asset-based loans to smaller firms. Additionally, schemes like MUDRA and SIDBI’s refinance programs promote collateralised lending to promote entrepreneurship.
Conclusion
An asset based loan plays a pivotal role in enabling Indian businesses to access capital efficiently by leveraging existing assets. Whether it is receivables, inventory, machinery, or property, these loans provide quicker and flexible financing options that traditional loans may not offer.
Understanding the various types of asset based loans helps enterprises tailor finance solutions to their unique needs, fostering sustainable growth. With supportive government policies and increasing awareness, asset based loans serve as a strategic tool for strengthening a company’s financial position without compromising ownership or operational agility.
For Indian businesses looking to improve liquidity, enhance working capital management, and fund expansion plans, asset based loans represent a practical and accessible financing option in the evolving BFSI ecosystem.