Asset-based lending, or ABL for short, is a type of corporate finance in which lenders use the worth of a company to determine whether to approve a loan. This is not like typical loans, wherein the credit approval process is determined by the business owner’s credit score, length in business, and cash flow of the company.
The collateral is the same assets you used to establish the loan. Collateral is necessary for all asset-based commercial loans, making them secured loans.
The most popular kind of financing in ABL is business lines of credit, however, these can also include loans for things like funding for equipment. Working capital requirements, such as purchasing merchandise, covering operating costs, or hiring more employees, can be met with the help of asset-based loans.
Asset-Based Lending’s Advantages for Businesses
Several business owners favour asset-based loans for the following reasons
- Put your company’s assets to use as working capital.
- Release restricted equity
- Boost your credit limit
- Take out a loan secured by assets.
- Make your balance sheet better.
Let’s get into the details of the benefits!
Quicker payback periods
Businesses can borrow money rapidly using asset-based lending and pay it back with the proceeds of assets they currently own or might acquire in the future. This lessens the need for them to borrow money from investors who might be more willing to take financial chances.
Greater borrowing flexibility
Companies can borrow any amount of money through asset-based financing, provided they can demonstrate that they are able to handle and apply the cash flow produced by the assets they are employing to fund their operations. Compared to traditional loans, this offers firms more borrowing flexibility and the capability to withstand changes in interest rates and commercial terms.
Reduced interest rates
Because assets are often purchased at a lower cost than equity or debt investments, asset-based lending frequently entails lower interest rates than loans obtained through traditional credit markets. Because of this, firms are able to afford high-interest rates on loan products and still make money from those assets, which accelerates the loan’s payback compared to using the same funds alone for debt payments.
Uplevel of Liquidity
Asset-based commercial loans give businesses more liquidity so they may swiftly invest in new goods and services or modernise their main office when they have access to cash flow. This is especially helpful for small business owners who find it difficult to get funds through venture capital or other means. It helps firms stay afloat during hard times.
Clearing the Debt
- Debt is a primary motivator for company loan acquisition. Utilising a loan to pay off debt can be done in several ways. The first step is to pay off all of your expenses with one monthly installment. You could save money on interest and find it easier to remember to make your payments.
- Another way you might use a loan to pay off debt is to get a cash advance on your credit cards. This may be an option for you if the interest rates on your credit card are too high and you need extra money to make your payments. To pay off the debt, you might alternatively seek an equity loan that is backed by your home.
- Finally, you can pay off the debt by refinancing your mortgage and using a business loan.
How does it Work?
- The primary goal of asset-based lending is to determine the value of your assets, which will be used to secure the loan. Unlike traditional loans, asset-based loans give the collateral you pledge priority over cash flow, according to commercial banks. Following that, they will assess your eligibility with regard to interest rates, other conditions, and the total amount you are qualified for.
- That being said, even if your credit isn’t the best but your collateral is highly valuable, there’s still a strong chance you’ll be accepted for an asset-based loan.
- Applying for an asset-based business loan is a simple process. All you need to do is submit a one-page online application, confirmation that your business has been in operation for at least a year, and bank statements covering a minimum of six months.
- If you give inventory, real estate, accounts receivable, machinery, and equipment as collateral, lenders may ask for field inspections and inventory appraisals to determine the quality and marketability of your assets.
- We will immediately send the funds into your account upon the completion of the underwriting process, which typically takes a few weeks. From there, you can use the money for almost any type of business purpose.
What Kinds of Loans Are Available for Asset-Based Businesses?
Asset-based loan financing come in two primary varieties:
Asset-based line of credit
These credit arrangements function as revolving lines of credit, drawing on the underlying collateral to provide enhanced cash flow and working capital. High-liquid assets with fixed values are some of the collateral used in the financing. A few items that are always in flux are inventory and accounts receivable, while machinery and equipment are included in this category.
The amount of liquidity on the revolving line of credit will be constant if the machinery and equipment have a set collateral value, but it will change depending on the quantity of inventory and accounts receivable that churn. A higher collateral value means that more funds will be accessible on the revolving credit line when more inventory is bought and sales are generated.
Asset-based term loan
An asset-backed loan is structured like a term loan but uses the same collateral as an asset-based line of credit, which is a revolving credit line.
Principal and interest payments on the term loan can be made on a monthly basis for a maximum of five years. We are able to offer high loan to values with low monthly loan payments by using fixed-value collateral, such as real estate, machinery, and equipment.
Final Words
Give Keev Finance a call right now if you’re thinking about getting an asset based commercial loan. Our knowledgeable staff is here to assist you in locating the ideal loan and to aid you through the process. Get in touch with us right away to find out more about our financing choices.