What is Asset-Based Lending (ABL) & How Does it Work?
Asset based loans include any type of financing that leverages existing assets so borrowers can access additional working capital. Under these programs a business can borrow against inventory, equipment, accounts receivable, or real estate. Asset based loans are a common type of business loan offered by banks, alternative lenders, and now many fin-tech lenders.
Continue reading the below asset based lending guide to learn more.
What is an asset-based lending facility?
Asset based lending refers to a form of business credit using business assets as leverage to secure additional working capital. A business can access its working capital quickly by using accounts receivable, inventory and equipment as assets.
Asset Based loans are structured as revolving asset-based lines of credit facilities supported by assets. This allows companies to borrow as necessary to support the company’s cash flow. Because of the secured(a lender will file a UCC for a security interest in the company assets) nature of an asset based financing, the costs will be more affordable than other options.
A more financially secure business should apply for an asset based loan before looking at merchant cash advance, purchase order factoring, a small business line of credit, or other unsecured loans. The cheapest loans available are typically asset based loans.
How does an asset based loan work?
A company’s assets hold tremendous value. So much so that asset based lenders will lend money to a company based on the company’s assets. Most lenders will look at physical assets(equipment and inventory) and highly liquid assets(accounts receivable financing like an ar based line of credit) while others will be focused on assets like intellectual property.
After a review of the company’s assets, a lender will provide a credit approval with a maximum loan or credit line amount. The formula for the loan lays out the borrowing capacity as a percentage of the borrowing base(leveraged assets). Therefore, if the loan exceeds the borrowing base then the borrower defaults.
Asset based credit lines may increase or decrease over time, due to a company’s assets. When that happens the availability to the business borrower will also increase and decrease.
The cost of an asset based loan is structured as an interest rate. The asset based loan rates are presented as an APR(annual percentage rate).
What types of companies use Asset Based Loans?
Asset-based loans cover a wide range of uses, therefore they are a good option for small business or large corporations. There are a lot of credit products that are available in the market, however the interest rates and costs are very attractive to businesses.
Industries that are typically highly leveraged with a lot of inventory, equipment, and other collateral are great candidates for assed based loans. These same companies often turn to factoring when they have a challenged balance sheet.
A good asset based lending example would be a wholesale apparel company that borrows money against their inventory and accounts receivable. This way the borrower always has products in house to sell, but is not stressed out over a lack of cash for operations.
Here are some example industries that find ABL programs to be very useful:
- Staffing companies
- Outsourced sales organizations
- Business services
- Ecommerce businesses
- Small business owners
- Wholesale and distribution businesses
- Borrowers looking to finance acquisitions
- Purchase Order based sales processes
Why do people use asset-based lending?
Generally, asset based loans work as revolving loans, allowing companies to borrow as necessary on an ongoing basis. This provides an ongoing source of cash for operations, expenses and investments. The loan fills in a gap between the outgoing cash for business operations and the in-going cash from payments.
Improved cash flow
Asset-based loans are an efficient means for companies to increase their cash flow. The ability to leverage assets eases the pain of waiting for payments to cover expenses. The funds help with purchasing raw materials or inventory prior to the production or sale. Since the customer uses accounts receivables as collateral, then they get the money advanced without the need to wait or customer payment.
Faster approval times
Alternative asset-based lenders can approve loans more quickly than banks can. Commercial banking institutions are subject to more scrutiny as a member FDIC. If you are looking for a quick turn around, try to find online banking alternative lenders
Flexibility in use of Proceeds
Most bank-backed traditional loans are granted for particular use of funds, therefore the proceeds may not be used for other expenses. The funds borrowed from an ABL may be for any business purpose, making them much more discretionary in its use.
Asset based loans can also be used to refinance an asset based loan for better terms or greater borrowing capacity. As your business grows over time, you will increase your assets on hand to improve your borrowing base. As the assets grow, you will qualify for better rates and more sophisticated lenders.
Asset based lending has never been easier
ABL used to be a complex product. However, thanks to new technology it is much easier to underwrite and manage. Lenders are using technology to help underwrite and service loans. The typical asset based loan is closed within 2-3 weeks depending on the type of lender you are working with.
Contact Star Funding to learn more
If you are in the market for an asset based loan or other working capital, then we can help. Star has been funding businesses for over 20 years and is known as one of the best asset based lenders in the United States. Please reach out to a Star Funding representative today to learn more about our solutions to solve your working capital concerns.
Most frequently asked asset based loan questions
- What are the types of asset-based loans? Asset based loans are available against inventory, accounts receivable(ar based credit lines), equipment, and intellectual property.
- What is a non bank asset-based lender? A non bank lender is a lender who is not an actual bank.
- What assets can be used for asset-backed loans? You can use inventory, accounts receivable, equipment, real estate or intellectual property.
- What does ABL stand for in lending? The acronym ABL stands for asset based loan.
- Is an ABL a term loan? Asset based loans are arranged as a business line of credit against your assets. Some term loans do require assets as collateral.
- How much does an ABL cost? The interest rate and costs associated with an asset based loan will vary based on collateral value, loan amount, and financial condition of the borrower.
- How long does it take to get an asset based loan? It should take no more than 2-3 weeks from date of signing a term sheet to close on an asset based loan, however, it could be longer.
- Can I qualify for an asset based loan if I sell internationally? Yes, many accounts receivable financing companies will also finance international accounts receivable or inventory in another country.
- What’s the difference between asset based lending vs bank financing? Some banks offer asset based lending. ABL facilities are provided by alternative lenders which offer quicker turnaround and greater availability.
- Define asset based lending – The definition of asset based lending is when a financial institution lends money that is supported by specific collateral of a business. This collateral can include accounts receivable, inventory, equipment, and real estate.
- Is there a list of top asset based lenders? – Asset based loans are not one size fits all. Therefore, there isn’t a list of the best asset-based lenders to fit everyone’s needs. It’s important to speak with lenders that have a long tenure and good reputation in the industry.