How asset-based lending works

How asset-based lending works

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You might have heard about the term «ABL» — but don’t know exactly how asset-based lending works. Get the overview here in this 3 minute read.

How asset-based lending works

For small, medium and large-sized companies that are in search of alternative ways to secure funding — hopefully due to growth and positive strategic pivots — asset-based lending (ABL) could be a potential solution. ABL works by utilizing the assets your business already has, such as accounts receivable, inventory, machinery or equipment as collateral for a loan.  

Here are the basics of ABL and how it could work for your business.

Why ABL?

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 can be easier to obtain than a bank loan.
  • Fewer covenants: As there 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 can your business obtain ABL?

Your asset-based loan request begins with a detailed assessment to determine the viability of your business and its assets — that is, your collateral. This initial process also includes a thorough field examination of your physical offices to observe things such as your accounting and internal control practices. Why? It’s important for the lender to be able to see the assets that will be used as collateral such as account receivables, inventory and machinery or 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.

Asset-based lending explained: How it works

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 used as an asset, 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.

Is my company a good candidates for ABL?

A wide range of industries including manufacturing, wholesale distribution, retail and service companies are often prime candidates for ABL. However, the most important factor is to have asset-rich balance sheets. This demonstrates that a majority of your total assets could be relatively liquid, such as accounts receivable (particularly with creditworthy customers) and inventory.

Lenders look for businesses with strong credit ratings that have deeply-integrated management teams, along with a solid history of operational performance. Many companies who qualify for ABL have a good amount of sales, but for one reason or another, may still not qualify for traditional bank financing.

Next steps: Choosing an ABL partner

Asset-based lending is an relatively common way for businesses experiencing rapid growth to get the funds necessary to fuel that uptick. 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. Could asset-based lending be the solution to your cash flow needs? Find out more about ABL today.

 

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Business agreement handshake

How to Find the Right Asset-Based Loan Partner

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Business agreement handshake

For many businesses, asset-based loans can be the perfect solution when they’re short on working capital but don’t currently qualify for a traditional loan. The key is finding the right funding partner that is willing to learn about your business, understand your challenges, and then work with you to find the optimal solution that will offer the most benefits to your growing business.

Finding that right partner is a vital part of the funding process, especially when you rely on their expertise, products, services and connections. Nothing can roadblock a company’s operations like lack of working capital. With asset-based loans, in particular, you’ll be accessing larger amounts of capital while agreeing on terms that maximize the value of your available assets. Obviously, working with a trusted partner is crucial.

 

Background: Who should consider an asset-based loan?

Asset-based loans (ABL) allow companies to leverage their accounts receivable, inventory, and in some cases, equipment and real estate to access working capital. Qualifying companies generally have a strong credit rating and maintain comprehensive financial reporting with strong internal controls — tending to be established businesses with a solid track record.

     Related: Get the 101 on Asset-Based Lending here.

 

With many funding options in the market, how can you tell which one is right for your business? Below are three main factors to consider.

1. Find a like-minded partner

Your ABL funding expert should feel like a genuine partner in your business. They’ll need to understand your business model, industry challenges, opportunities, and any unique processes you have in place. A partner with an entrepreneurial mindset and personal experience as a business owner/operator could also add to their understanding of where you’re coming from and where you are going.

Also, look for funding partners who have cut their own red tape and complicated approval processes. These can slow down your ability to access cash flow when it’s needed — but be careful to ensure they are still credible and still have a strong reputation in the market.

Ultimately, a like-minded partner will work with you in the long-term and should go the extra mile to create more availability against eligible collateral. That means your assets will provide the biggest return for working capital.

2. Look for value beyond the “money”

Your ABL partner should be more than just a person that writes you a check.

Factor in various aspects of value beyond the capital they provide. With ABL, rates are generally competitive but on par with different vendors, so it’s important to assess other criteria that can show who you’re dealing with.

Look for service partners who will provide access to their referral networks that can extend your business relationships. This longer-term value is often overlooked but can be a strategic benefit. A trusted partner will also provide access to advice related to the struggles of a growing business, and they’ll be able to offer strategic business advice and beneficial tools as you grow the company. Their network along with access to like-minded entrepreneurs are invaluable to a business facing the challenges of growth and emergence.

3. Work with a person, not just a piece of software

Technology is an important aspect of modern business, but when it comes to a funding relationship, you should be working with a real person.

In particular, find local representation and experts who will be responsive when you have questions or challenges. Look for an organization with strong underwriting, risk assessment and good relationships within the industry. Your partner should also be able to work with you to offer creative solutions to your business funding needs.

With ABL, your company is going to be relying on the funding partner for large amounts of working capital, and this shouldn’t be trusted to a piece of software or website touting fast-funding without strategic consultation.

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What Is Fintech And Why Does It Matter?

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The term “fintech” seems to be everywhere lately. Is this just a buzzword or is it buzzworthy? Let’s look at the details.

What is fintech?

Fintech is the shortened term for “financial technology.” It refers to companies that find ways to make financial services more efficient, intelligent and user-friendly by adopting and incorporating innovative technology and applications.

These can include different types of payment services, financial services, peer-to-peer transactions, alternative lending platforms and new crypto-currencies. And while some of these companies and new systems, like Bitcoin for example, have been seemingly quite volatile and downright confusing, there are an increasing number that have a much broader appeal to consumers and businesses alike.

Startups are the most common fintech company, as they can reinvent the wheel and start from the ground up for financial applications and processes – which are often complex and extremely resource heavy to change in legacy companies. These new fintech companies can also challenge the traditional system and create disruption in the market by offering new software and service that customers will expect from all competitors.

One example becoming more common is mobile payments. In some markets in fact, using your smartphone to pay for items is an everyday occurrence. And mobile banking has become more secure, safe and reliable – with apps providing instant access to the majority of your everyday banking needs. As consumers become more familiar and comfortable with such services, services such as Apple Pay are starting to gain real momentum and will force retailers, consumers and the financial industry to adapt.

Some high profile fintech companies getting a lot of buzz include:

  • Sofi: This fintech firm started by offering student loan assistance, then building upon that relationship to enter personal finance including mortgages and personal loans. By taking employment history and other factors into account, they’ve been able to offer solutions that weren’t typically available, especially to the younger consumer demographic.
  • OurCrowd: This Jerusalem-based company is considered a leader in equity crowdfunding for accredited investors. Managed by a team of investment pros who fund startups, they have put up $170 million from 1,500 investors.
  • Square: A simple device that turns your smartphone or tablet into a cash register. Swipe a customer card, accept payment, email receipts and get reports right to your laptop.

How will fintech companies change the market?

Although fintech companies are a hot trend, they are not forecast to wipe out traditional banking. Rather, they’ll be seen as a complement to the system, providing an ‘assist’ to bankers’ normal activities and practices while providing more options for customers in terms of available day-to-day technology.

The Economist reports that Silicon Valley fintech firms received $4 billion in funding in 2013, then an increase to $12 billion in 2014.  With such an influx in venture capital (VC) and other dollars, there’s no question this industry is set for success, and not just a flash in the pan trend.

That same report shows three key ways that fintech will change the market:

1. Cutting costs and improving quality of financial services: Without the same regulators, legacy IT systems that are complex and outdated, and brick-and-mortar branches as the old-school banking institutions, there are immediate cost savings possible in this industry. Fintech firms, in conjunction with alternative lenders, can often offer better deals to both borrowers and lenders.

2. Risk assessment: These new companies are clever – by capturing information from social media sites and online reviews to assess a small business’ performance. They also use machine learning to improve underwriting, and sites like Kickstarter are using crowdsourcing to help fund the fintech companies. By relying on algorithms and an innovative new generation of consumers, the industry can offer a fresh suite of services and limit their own risk.

3. Diversifying and stabilizing the credit landscape: By being geographically widespread and avoiding the heavy overhead of bricks-and-mortar locations like many traditional institutions, fintech firms can potentially limit their liability. They match borrowers with lenders and act as the platform or middleman to get the deal done. The lender assumes the risk so the fintech firm can grow their business and offerings. Other more established lenders can take advantage of fintech in order to access the best people, the best practices and make better decisions by not being limited to geography.

Should my business partner with a fintech firm? 

If you value the face-to-face relationships in business, you may not get that with a fintech firm for your financing needs. They are fast growing, looking for new business and may not offer traditional in-person service. That’s not to say this is the case with every fintech firm, but keep this in mind when investigating options for your business dealings.

And if you’re looking to develop a business partnership with a firm that has a rich history and experience in the market, and not just one with a rich VC funding, this may not be the place for you. There is nothing wrong with startups, VC funded companies and growth. In fact, it’s quite the opposite. Entrepreneurs, business owners and innovators in fintech firms are forward thinking and help advance the entire industry, and should be well respected.

But businesses will no doubt come and go, be swallowed up by competition and perform the classic startup “pivot.” As with any business decision, due diligence is the best practice when deciding on which partners are best for your company.