Explain and Define the Four Types of Asset Backed Loans

question 49

Essay

Explain and define the four types of asset backed loans.
A.Accounts Receivable - using A/R as collateral a bank may finance up to 80% of accounts receivable balance,can be factored (bank incurs risk of collection therefore more expensive)or unfactored (entrepreneur incurs risk of collection.
B.Inventory - Inventory is used as collateral.Usually,the finished goods inventory can be financed for up to 50 percent of its value.Trust receipts are a unique type of inventory loan used to finance floor plans of retailers,such as automobile and appliance dealers.In trust receipts,the bank advances a large percentage of the invoice price of the goods and is paid on a pro rata basis as the inventory is sold.
C.Equipment - Equipment can be used to secure longer-term financing,usually on a 3- to 10-year basis.When new equipment is being purchased or presently owned equipment is used as collateral,usually 50 to 80 percent of the value of the equipment can be financed depending on its salability.In the sale-leaseback arrangement,the entrepreneur "sells" the equipment to a lender and then leases it back for the life of the equipment to ensure its continued use.
D.Real estate - This mortgage financing is usually easily obtained to finance a company's land,plant,or another building,often up to 75 percent of its value.

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Definitions:

Expected Revenue

The predicted amount of money that a business will bring in from its operations or activities, typically within a certain period.

English Auction

A method of auctioning in which bidders publicly submit increasingly higher bids until no higher bid is offered, and the highest bidder wins the item.

Reservation Price

The highest price a consumer is willing to pay for a particular good or service, reflecting the limit of their willingness to purchase.

Expected Revenue

The total amount of money anticipated to be received from sales of goods or services, based on expected sales volumes and prices.