For mid and large-sized companies that are in search of alternative ways to secure funding for growth and change, asset-based lending (ABL) is often a viable solution. ABL works by utilizing the assets your business already has, such as accounts receivable, inventory, or machinery/equipment, as collateral for a loan.
Here are the basics of ABL and how it could work for your business:
Asset-based lending has a number of benefits over traditional bank loans. Some of these benefits include:
- Speed: Delivery of funds via ABL is generally much faster than traditional banking tools.
- Improved liquidity: ABL can help make your cash flow much more predictable — particularly during times of rapid growth.
- Flexibility: Funds received via ABL can be used for almost any purpose as long as it is a business need.
- Access: An asset-based financing program is generally easier to obtain than a bank loan.
- Fewer covenants: As there are are less covenants associated with ABL, managing the line and staying compliant is much easier than with a chartered bank.
ABL can also have the added bonus of laying the foundation for other methods of funding.
How does a business obtain ABL?
Your asset based loan request begins with a rigorous assessment of the potential borrower to determine the viability of the business and its assets (collateral). It also includes a thorough field examination of the offices of the borrower to observe their accounting and internal control practices, focusing on the assets to be used as collateral such as account receivables, inventory and machinery/equipment.
This assessment will include a number of appraisals, such as that of the inventory to determine the net orderly liquidation value (NOLV) and the market value. Upon completion of all reviews and appraisals, the loan agreement will be created.
What determines the rate and terms of ABL?
A number of factors can influence how much money a borrower receives and at what cost. A lender will generally fund up to 80% of the total accounts receivable, but this can go higher if the accounts receivable is insured.
If inventory is the asset used, funding is derived from a percentage of the NOLV, cost or market value. Deductions can be made if there is inventory abroad or obsolete stock.
What companies are good candidates for ABL? *
A wide range of industries including manufacturing, wholesale distribution, retail, and service companies are often the source of prime candidates for ABL. However, the most important factor is to have asset-rich balance sheets, demonstrating a majority of their total assets in working capital, such as accounts receivable (particularly with creditworthy customers) and inventory.
Lenders look for businesses with strong credit ratings that have deeply-integrated management teams and a demonstrable history of operational performance. Many recipients of these types of ABL are at a stage of their business where there are sales, but not enough yet to qualify for traditional bank financing.
Next steps: Choosing an ABL partner
Asset-based lending is an increasingly common way for businesses experiencing rapid growth to get the funds necessary to fuel it. If ABL is on your radar, be sure to consider the following when evaluating potential partners:
- Relevant industry experience
- Length of time in business
- Availability and customer service
- Their funding sources
ABL is one of the most flexible tools available for fast-growing businesses that are in search of an alternative to banks, regardless of the reason why.
Could asset-based lending be the solution to your cash flow needs? Find out more about ABL today.