Asset-Light Debt
What Is Asset-Light Debt?
Asset-light debt is a form of corporate debt where the amount of collateral is below regular standards. A company might not have the assets to post as collateral for a loan and may search out cash flow financing, utilizing their cash flow to meet all requirements for a loan. This leaves the loan secured with next to zero assets.
Understanding Asset-Light Debt
Asset-light debt is issued with next to zero collateral. A borrower may rather utilize their credit quality or consistent earnings to show their ability to pay. Nonetheless, asset-light debt is dangerous for organizations since, supposing that there is a downturn in the market and their revenues drop, they might find themselves unfit to service their loans and facing bankruptcy.
Companies might have a generally asset-light debt structure, or look for an asset-light loan, for a number of reasons. Those with asset-light debt generally depend on their cash flows to meet all requirements for loans. Asset-light debt additionally requires the borrower to have better credit quality than asset-backed loans and consistent earnings.
These companies might carry less overall debt given the lack of collateral. [Unsecured loans,](/unsecuredloan, for example, revolvers and credit lines, are types of asset-light debt.
Companies utilizing asset-light debt can be holding companies. These companies own essentially no assets, or just one specific asset, and are formed for the specific purpose of servicing a loan. In common asset-light cases, that purpose may be to hold the debt of a parent company. In that case, the company could have zero assets and a loan.
Asset-Light Debt Example
Banks and lenders generally require a company to put an asset up as collateral for the loan. This secures the loan so in the event of default, the bank can utilize the asset to cover a portion of the loan loss.
For instance, a bank generally offers a loan that is 70% of the value of the collateral. Company ABC utilizes a $100,000 piece of equipment to secure a $70,000 loan. On the off chance that the bank needs to repossess the equipment, there is sufficient value to cover the loan balance even assuming that they need to resale it at a discount.
On account of asset-light debt, the bank might acknowledge a more modest amount of collateral and think about the company's free cash flow. For instance, Holding Company ABC has a $200,000 loan yet $10,000 in assets. The parent company's guaranteed cash flows, or dividends, to the holding company are utilized rather to secure the loan. The utilization of this asset-light debt structure protects the parent company should the loan become unserviceable. Special purpose vehicles (SPVs) can be asset-light, going about as a method for financing assets with minimal collateral or equity.
Highlights
- Asset-light debt is corporate debt secured with next to zero collateral.
- This type of debt might exist when a company doesn't have the assets to post as collateral for a loan.
- In this case, a company might utilize their cash flow, or dividends, to meet all requirements for a loan.
