Asset-based lending involves loaning money using the borrower's assets as collateral. A company can take its physical assets and turn them into cash.
Asset-based lending is often used by small to mid-sized businesses in order to cover short-term cash flow demands.
Asset based loans can be used by any company that needs working capital to operate or grow. Often, companies that request an ABL have cash flow or cash management issues. The asset based loan can often help companies manage the cash flow issues and help stabilize the company for the future.
Generally, asset based financing is offered to small and mid-sized companies that have assets that can be financed. The company’s assets must not be pledged as collateral to another lender. If they are pledged to another lender, the other lender must agree to subordinate its position or be paid from the proceeds.
Also, the company must not have any serious accounting, legal, or tax issues which could encumber the assets.
Most asset based loans have a minimum of $250,000 to $1,000,000 in utilization requirements.
The main collateral for an asset based loan is usually accounts receivable. However, other collateral such as inventory, equipment, and other assets can also be used.
The borrowing base is the amount of money that the asset based lending company lets you borrow. The borrowing base is determined as a percentage of the value of the collateral that has been pledged. Generally, companies can borrow 75% – 85% of the value of their accounts receivable. The borrowing base of inventory and equipment is often 50% or less.
Asset based lenders inspect ledgers and assets regularly to determine and update the value of the borrowing base. Since it often involves accounts receivable, the borrowing base fluctuates.
Before offering a loan, the lender needs to complete its due diligence process. During due diligence, the lender calculates the value of your collateral, determines if there are any encumbrances on the collateral, and inspects the accounting book. Lenders often do an onsite visit and speak to relevant employees.
Lenders often charge for the site visit and collateral evaluations, though costs vary.
The cost of an asset based loan is determined by the size of the loan, the type of collateral, and general risk. Most loans are priced using an annual percentage rate (APR). However, charges for other services are also common.
The APR of an ABL ranges from 7% to 17%.
Asset based loans are often confused with factoring. These products are different but provide similar benefits. Part of the confusion stems from the fact that both products use accounts receivable as their main collateral.
However, there are important differences. In a factoring transaction, the company does not borrow money. It sells its receivables to improve its cash flow. Receivables are sold and ledgered individually, rather than financed in bulk.
Lastly, the factoring company is involved in the collections process. This allows the finance company to work with smaller companies – or troubled companies – who would not qualify for an asset based loan. To learn more, read “Asset Based Loans vs. Factoring.”
There is no better product, per se. The “better” solution depends on your corporate needs, the type of collateral you have, the size of your company, and the general risk of the transaction.
Larger companies tend to prefer asset based loans due to the lower ongoing cost and flexibility. Smaller companies tend to prefer factoring because it has low due diligence costs and is easier to obtain.
SpotOn Financial is a local provider of asset based financing. For more information, click here to apply or call us toll-free at (844) 622-5666.