BACKGROUND – What is Asset Based Lending or ABL?
An asset based loan (ABL) is a type of business financing that is secured by company assets. Most asset based loans are structured to work as revolving lines of credit. This structuring allows a company to borrow from assets on an ongoing basis to cover expenses or investments as needed.
Asset-based lending (ABL) is a great solution for businesses that have needs that are outside of what traditional banks can offer. Whether it’s greater leverage, softer covenants, or more flexibility, asset based structures can be customized to meet the needs of each individual company. Asset-based lending provides a line of credit based on your company’s eligible:
- Accounts receivable
- Machinery and equipment
Asset-based lending offers more flexibility than other methods of financing, and is a fast and cost-effective way to obtain working capital. Unlike certain types of structured financial products, with an asset-based lending relationship, you do not have to give up equity in your company. ABL gives your company the flexibility it needs to grow, recapitalize, take advantage of supplier discounts, buyout shareholders, or even to fund payroll. It can increase or decrease based on your current business size and needs, and you’ll have daily and weekly access to your line of credit when you request it.
How Asset Based Lending Works:
Businesses need to take out loans or obtain lines of credit to meet routine cash flow demands. For example, a business might obtain a line of credit to make sure it can cover its payroll expenses even if there's a brief delay in payments it expects to receive.
If the company seeking the loan cannot show enough cash flow or cash assets to cover a loan, the lender may offer to approve the loan with its physical assets as collateral. For example, a new restaurant might be able to obtain a loan only by using its equipment as collateral.
The terms and conditions of an asset-based loan depend on the type and value of the assets offered as security. Lenders prefer highly liquid collateral such as securities that can readily be converted to cash if the borrower defaults on the payments. Loans using physical assets are considered riskier, so the maximum loan will be considerably less than the book value of the assets.
For example, if a company seeks a $200,000 loan to expand its operations. If the company pledges the highly liquid marketable securities on its balance sheet as collateral, the lender may grant a loan equaling 85% of the face value of the securities. If the firm’s securities are valued at $200,000, the lender will be willing to loan $170,000. If the company chooses to pledge less liquid assets, such as real estate or equipment, it may only be offered 50% of its required financing, or $100,000.
In both cases, the discount represents the costs of converting the collateral to cash and its potential loss in market value.
Typically, Interest rates on asset-based loans are lower than rates on unsecured loans or lines of credit since the lender can recoup most or all of its losses in the event that the borrower defaults. However, the interest rates charged depend on the applicant's credit history, cash flow, and length of time doing business.
- Asset-based lending is loaning of money using the borrower's assets as collateral.
- Asset-based lenders prefer highly liquid collateral such as securities to physical assets such as equipment.
- Asset-based lenders primarily serve small and mid-sized businesses that need to routinely cover short-term cash flow demands.
Business owners seeking immediate capital, leasing solutions to grow their respective businesses and either have no credit issues or have issues we have discussed today need to contact me immediately at firstname.lastname@example.org or call me at 303-520-2493.
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