About Secured Finance
In the simplest terms, Secured Finance is a business loan backed by collateral. Collateral can be any business asset—cash, accounts receivable, inventory, machinery, equipment, real estate and even intangibles such as patents, copywrites and trademarks. The value of the collateral is most important in determining the amount of the loan.
Other important aspects of Secured Finance include continued monitoring, control and third-party validation of the collateral which provides added protection for lenders in addition to their legal claim to the borrower’s property. In many cases collateral value mitigates repayment risk in cases where the borrower’s cash flow is stressed by either rapid growth or a business downturn.
Asset-based lenders typically use a borrowing-base formula (derived by multiplying the value of eligible collateral by an advance rate or discount factor) to structure transactions. Advance rates such as 75-80% of eligible receivables and 40-50% of eligible inventory are typical. For additional details on the practice and procedure of ABL, please see Asset Based Finance – Proven Disciplines for Prudent Lending by Professor Gregory F. Udell.
What products fall under the Secured Finance umbrella?
The secured finance universe encompasses seven major financing types: asset-based lending (ABL), factoring, supply chain finance, equipment finance and leasing, leveraged lending, cash flow lending and asset-backed securitization. To some degree, each of these financing types involves one form or another of a secured interest in the borrower’s assets and/or equity. These financing transactions universally involve governing documentation (such as a credit agreement, or for factoring, a purchase of receivables) and some form of security interest (a lien) on assets.
For additional details on the size and scope of the Secured Finance industry, please see the SFNet Market Sizing & Impact Study.
What are the benefits of secured financing?
Secured financing is very often more flexible than a traditional commercial bank business loan including:
- Ability to borrow significantly larger sums.
- Lower all-in costs than mezzanine loans, subordinated debt or equity.
- Fewer restrictive covenants.
- Longer repayment terms.
- Revolving loan facilities not requiring pay down unless collateral diminishes or deteriorates.