Some New Techniques for Unlocking Asset-Based Loans for Business Finance

Most SMEs have a significant amount of cash invested in assets, for example, inventories, machines, equipment, real estate, or financial assets. Using these assets in an easy and flexible way to make loans could unlock huge amounts of liquidity and alternative sources of financing for the business. In this blog, we discuss some new techniques to make rating underlying assets easier and more automated.

In the B2C market, consumer loans can already be originated with a few clicks and completely online. This is, for example, the case with credit cards, overdrafts, installment loans and, more recently, Buy Now Pay Later (BNPL). Additionally, many banks are further digitizing their mortgage origination processes, allowing customers to simulate and initiate a home loan without visiting the bank branch.

At B2B market however, we still see a lot of manual efforts. In the case of large companies, this can be justified to some extent, given the typically high loan amounts and the high degree of customization. However, for SMEs this is less acceptable from both the customer and the bank point of view.

The customer representative is often the CEO (or CFO) who performs those operations, which means they want to have this as quickly and efficiently as possible. Additionally, SMEs often do not have the tools to optimize cash management, which means that rapid credit origination can mean the difference between life and death for the business. For banks, the (lower) amounts of SME loans often do not justify a high degree of human interaction, as this would reduce profit margins.

As a result, there is a need for further digitization (in the form of online self-service). Many SMB loan products are already well automated, such as an overdraft line or a tax credit, and more recently, various Fintech offerings have hit the market that automate invoice factoring (i.e., using accounts receivable or invoices as a product). underlying credit). Nevertheless asset-based loans they are still quite manual, as the underlying asset (collateral) needs to be identified, described, analyzed (for example, checking the quality, ownership of the asset, the liquidity of the asset, etc.) and valued, which is much more difficult to automate.

However, newer techniques can make this Much more fluid and automated underlying asset rating.. Some examples are:

  • In the event that the asset refers to a securities account or an insurance contract managed in the bank, it will be Lombard Credit Loan it can be ideal. As these assets are highly standardized and under the full control of the bank, it is possible to originate these credits in just a few clicks. Cf. the Capilever Lombard² Offering.
  • IoT devices (as sensors) can help in the continuous monitoring of the underlying assets (i.e. monitoring if the asset still exists and if its quality has not declined). This enables continuous monitoring of the underlying assets and can automate certain manual labor-intensive tasks that are performed today.
  • A automated asset revaluation This can be done through estimation models, for example by tailoring the value using asset-linked indices (cf. Capilever’s NLPT offering) or by using specific service providers (for example, Rockestate).
  • TO regular quality and property control it can be supported by automatic alerts when verification is needed, supported by uploading certain test documents or a simple image of the asset (cf. NLPT).
  • Open accounting it can help banks to obtain an immediate connection in real time with the latest accounting situation of the company, allowing the extraction of information in real time on certain assets. Tools like Silverfin, Xero, Sage, Intuit QuickBooks, etc. they can help with this. This connection makes it possible to assess the solvency of an SME by evaluating business performance in real time, rather than using outdated annual reports. More and more banks are also offering value-added services to SMEs for financial management (for example, to predict future liquidity). Offering these tools also enables banks to gain better insights into the reliability, liquidity, and solvency of an SME client.
  • A number of blockchain-related initiatives are being developed, which will publicly store ownership of certain assets (such as property, art, etc.).
  • Contract management tools, which allow the automatic generation of tailor-made guarantee contracts, based on an extensive set of rules, which determine how to write the contract by concatenating a series of standard paragraphs and clauses.

For banks, evaluating collateral should be a continuous and holistic effort, that is to say

  • Ideally, a guarantee should be a mix of different types of assets. For example, a property maintains a relatively stable value and is less risky, but is not very liquid, whereas some inventory could be liquidated much more quickly but can also lose its value quickly (for example, when the expiration date of the product has passed ). Therefore, it may be interesting for banks to use a set of guarantees, with different characteristics in terms of value stability and liquidity. The better the quality of the asset pool, the lower the lender’s risk and interest rate.
  • TO continuous monitoring of the underlying assets is necessary, that is, not only at the time of origination. This means a periodic verification of the quality and ownership of the asset, a reassessment of the liquidity of the asset and a revaluation of the asset. In this way, the lender ensures that a sufficient collateral value is maintained in the event of credit repayment problems or even default. It also means that margin calls should be anticipated when the value of the collateral no longer covers the amount of the outstanding credit.

Despite its huge potential As illustrated above, asset-based loans are still underestimated. Most SMEs have a significant amount of cash invested in assets, such as inventory, machinery / equipment, real estate, or financial assets. Use those assets in an easy and flexible way to make loans could unlock large amounts of liquidity.

For both banks and SMEs, this can be reliable access to capital with limited risk. It also makes SMEs less dependent on credit scores, allowing for greater
prospective credit risk assessment. This means that you can even qualify as a young or new company, as long as you can provide the necessary assets as collateral.

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