|Airball Loan|| |
A loan with minimal or inadequate tangible collateral, as opposed to an asset-based loan, which is a loan with collateral.
A loan made to a borrower with inadequate or no collateral is judged by the fact that the loan amount exceeds the collateral's liquidation value. These kinds of loans, loans made to small and middle-market businesses that could be called pre-revenue loans, pre-profit loans, or bridge loans, are extremely rare. Banks seem to avoid such loans. A lender with incentive to make such a loan can use interesting ways to assess and manage the risks of doing so. Instead of looking to hard assets or years of profitability, some lenders might look to different sources for comfort. Specifically, they could look for:
* Professional managers deeply knowledgeable about their industry;
* An outside board of directors equally steeped in the industry;
* Investors prepared to participate in an upcoming round of equity financing;
* Other signs of the borrower's ability to repay a loan.
Capital of this kind may be available, but at a high cost, to these companies from a few non-bank lenders. Because these loans are difficult to obtain, lenders can get highly competitive terms, high interest rates, and a substantial amount of warrants to purchase stock in the companies to which they lend.