Helping you quickly & efficiently finance business activities
Asset based lending, frequently called “ABL”, is a type of loan that is secured by various types of collateral. Most commonly used by businesses, asset-based loans are typically secured by accounts receivable, inventory, equipment or real estate. Whereas banks typically approve loans based on a proven record of predictable cash flow, asset-based lender’s approach to underwriting is more reliant on the collateral coverage for repayment. This often allows ABL lenders the ability to approve an asset-based loan where a bank would not.
Most asset-based loans are structured to work as revolving lines of credit, allowing the company to borrow as needed and on a continuing basis. This provides a continual stream of cash for operations, expenses and investments and can generally bridge gaps between outgoing cash for operations and incoming cash from payments.
As you grow and acquire additional assets (equipment, accounts receivable, inventory, real estate), the asset base of the loan grows, thus providing increases in the availability under the line of credit, which then enables you to make purchases and increase or improve operations.
Many traditional bank loans are approved for a specific purpose or use of funds (equipment acquisition, for example) and therefore the proceeds cannot be used for other expenditures. Funds borrowed from an ABL can be used for any business purpose, and therefore at the discretion of the company.
Oftentimes asset-based lenders approve loans faster than a bank will approve a traditional business loan. The lender will evaluate the collateral being pledged, but because the approval isn’t based solely on historical financial statements or predictable cash flow, review and documentation is often faster.
When banks review loan applications, they have specific ratios and loan covenants that must be met. Companies with high debt-to-worth ratios may fall outside the banks’ allowed credit approval criteria. Non-bank asset based lenders are not subject to these constraints and can therefore approve an asset based loan structure much easier with more weight on the collateral and future prospects of the business.
Asset based loans can improve your company’s cash flow by smoothing the peaks and valleys brought about by the timing differences between the expenditures and receipt of cash. Funds can be used to purchase inventory or raw material ahead of production and sales. Or, when using accounts receivables as the collateral, you have access to funds without having to wait the typical 30-90 days for the customer to pay.
Loan structure for ABL is dependent upon the capital intensity of your business. We can provide financing using different assets, such as accounts receivable, inventory, equipment, and real estate. Structure and asset mix depend on the assets available and the needs of the company.
Asset based loans are a great alternative for rapidly growing companies, or those that are highly leveraged, undercapitalized, in turnaround or recovery cycles, or otherwise not bankable. Companies that have cash tied up in raw material and finished goods inventory or that experience seasonality or significant gaps in cash outlay and cash receipts are also good candidates for asset-based loans.
For example, a manufacturing company that must purchase raw material prior to production but won’t receive payment until 30-90 days after production is completed will experience a negative cash flow for that project. An asset- based lender can finance the inventory, accounts receivable, unencumbered equipment and real estate to help the manufacturer improve cash flow and working capital.
Accounts receivable financing, inventory financing, and other forms of asset based loans can significantly improve the working capital position of companies that have delays between inventory purchases and payment for finished goods.
With an asset based loan, the borrower grants the lender a security interest in the collateral. That security interest is the borrowing base for the loan. The lender will establish a maximum limit on the credit line and the borrower requests funds as needed, provided they are meeting the predetermined borrowing base criteria.
The size of the borrowing base grows and shrinks with the size of the asset base, and the amount available to borrow will depend on the size of the borrowing base, which is comprised of accounts receivable, inventory and/or equipment.
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