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Asset Based Lending

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What is Asset Based Lending?

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.

Why use Asset Based Lending?

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.

A revolving line of credit allows a company to access cash repeatedly without having to open new loans, thus saving time and money.

A revolving line of credit allows a company to access cash repeatedly without having to open new loans, thus saving time and money.

What are the benefits of using Asset Based Loans?

  • Borrowing capacity grows as the collateral base grows
  • Approval times are typically faster than traditional bank loans
  • Improved cash flow
  • Flexibility in use of proceeds (as long as the proceeds are used for business expenditures)
  • Can be used by companies with high debt-to-worth ratios
  • Loan structure flexibility

Detailed Benefits of Asset Based Loans

Borrowing Capacity Growth

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.

Flexibility in Use of Proceeds

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.

Faster Approval Times

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.

For Companies with High Debt-to-Worth Ratios

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.

Improved Cash Flow

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 Flexibility

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.

What types of companies use Asset Based Loans?

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.

Asset-based loans can be used by companies in the following industries (and more):

  • Manufacturing
  • Staffing
  • Distribution
  • Logistics
  • Transportation
  • Business Services

Asset-based loans can be used by companies in the following situations:

  • Limited operating history
  • Rapid growth
  • Transition or turnaround
  • Acquisition
  • Recapitalization

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.

How Does an Asset Based Loan Work?

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.

How Does an Asset Based Loan Work?

Asset based lending has never been easier

At Commercial Funding Inc., we’re committed to making the lending process as simple as possible. With just a couple of clicks you can turn your assets into cash—

Your business may qualify for an asset-based loan with CFI if:

  • You are a B2B company (your customers are all companies)
  • You send invoices to your customers
  • Your customers have good credit
  • Your assets are not currently pledged to another entity
  • You have accounts receivables of $500,000 or higher

To get started, simply complete the form below. A member of our team will contact you to discuss your specific situation.

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