Asset-backed lending is a loan that is secured on an asset such as machinery, equipment and/or items of your inventory. If the borrower defaults, ie the repayments are not met, the assets that the loan is secured against will be sold in order to try to recover any losses incurred. This fairly straightforward method of obtaining a loan can come in two forms – physical and non-physical:
- physical asset – property, equipment, machinery etc
- non-physical asset – invoices, trademarks, contracts etc.
Assets are typically subject to various tests to ensure they are worth securing against and to guarantee that they can be sold in an appropriate time frame in the event that lost capital needs to be recovered.
Who Uses Asset-backed Loans?
This method of achieving a loan is typically used by small to medium sized companies that need working capital to stimulate growth. Often, companies that apply for an asset-backed loan have exhausted all other lending options without success, despite being stable organisations with assets that can be financed. Nevertheless, companies that do pursue asset-backed options often have cashflow problems and this can be a major factor in their failure to secure a loan elsewhere.
Cashflow issues often stem from periods of rapid growth and are not always a sign that a business is doing badly. Asset-backed lending can help organisations manage these issues and better position a company for rapid growth. For a business to successfully acquire an asset-backed loan, it must not present any serious legal, accounting or tax issues that could hamper its assets.
What Are The Advantages of Asset-backed Lending?
An asset-backed loan can be a much-needed and much-appreciated source of capital for rapidly growing companies that struggle to secure finance elsewhere. It is also particularly useful to companies that are undercapitalised or in the midst of a turnaround.
Sometimes, a cash injection is required just to ensure growth does not fizzle out or to recover from a slight financial hump. This is where asset-backed loans are extremely beneficial. Companies that have a leveraged balance sheet and cashflow affected by seasonal needs and industry cycles also reap the benefits of asset-backed loans.
What Happens If An Asset-backed Loan Isn’t Repaid?
If an asset-backed loan is not repaid or defaults in any way, the loan provider takes ownership of the asset against which the loan was secured. It is then up to them to sell the asset in an attempt to recover the money owed.
Investors choosing an asset-backed P2P platform rather than a conventional platform therefore have a greater level of peace of mind regarding their loans in the case of one or more borrowers defaulting.
Wellesley & Co’s Asset-backed P2P Model
Wellesley Finance, the sister company of Wellesley & Co, lends money predominately (but not exclusively) to commercial property developers and therefore the physical assets that our loans are secured against are typically residential properties. Property developers tend to use the loan to refurbish properties that they plan to let out on the private rental market, or eventually sell on.
This unique model therefore gives investors the opportunity to invest in property whilst achieving competitive returns of up to 6.32% – far higher than the rates offered by traditional methods.
Of course there are risks involved with our asset-backed platform, the primary ones being that the property developer defaults on their loan, or the property market plummets. We aim to minimise these risks in various ways – for example, our highly experienced Credit Committee stringently assesses all loans before acceptance and, as discussed, the asset-backed element means that we can sell properties to recoup any losses should a borrower default.
Since July 2013, we’ve lent £230 million against property assets, showing substantial demand for redevelopment finance, and we see this a great opportunity to contribute towards a much needed boost for the UK housing market in the midst of difficult times.
Take a look at our borrower page to see an example of some of the fantastic development loans Wellesley & Co. have funded and if you would like more information on our leading asset-backed model, speak to our Customer Service Team on 0800 888 6001 or e-mail us at [email protected].