Companies with physical assets such as inventory, accounts receivable, or equipment may qualify for asset-based lending loans based on their underlying asset value and typically structured as revolving lines of credit. Remittances sent directly from companies are then advanced against an asset-backed line of credit by the lender.
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Asset based lending may benefit many types of businesses. These include manufacturing firms with seasonal or cyclical ups and downs in volume; transportation/freight hauling firms; as well as retailers who experience fluctuations in sales.
Accounts receivable and inventory are the main assets used as collateral in asset based loans; other assets, including commercial real estate and intellectual property can also be pledged. All pledged assets are subject to field inspections, third-party appraisals and assessments of their quality and marketability prior to being pledged as collateral.
Asset based lending offers numerous advantages over cash flow-based financing, particularly the elimination of covenants that typically accompany it, such as maintaining certain levels of debt service coverage and leverage. Furthermore, its collateral-based approach means lenders are less likely to limit loan availability or increase interest rates in response to sudden drops in revenue.
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Businesses looking for loans to finance major capital investments or turnarounds may benefit from exploring asset-based lines of credit as a viable financing solution. These lines of credit are secured by assets on their balance sheets such as inventory, equipment and accounts receivable – with less restrictive covenants than conventional lines of credit and more flexibility available than ever for businesses looking for financial backing.
An asset-backed line can be secured with various types of assets; the primary requirement being high-quality assets with sufficient liquidity and market value. Such assets could include accounts receivable, inventory, marketable securities, equipment or intellectual property – making this type of loan suitable for working capital intensive industries such as manufacturing and distribution.
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Asset-based loans provide business owners with a fast, flexible working capital solution to address seasonal cash flow fluctuations, meet operating needs and take advantage of growth opportunities. Furthermore, asset based lending often offers more favourable financing terms than traditional loan options.
Lenders will typically evaluate your collateral’s value through field examinations and third-party inventory and equipment appraisals, taking into account make, model and year information to ascertain its resale value – which allows lenders to offer higher loan-to-values with longer loan terms.
Not all assets qualify as collateral for asset-based financing, such as inventory, accounts receivable, machinery and equipment or commercial real estate (CRE), marketable securities or intellectual property. Examples of assets not eligible as collateral include specialized goods with high depreciation rates as well as perishable products that spoil quickly.
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A business line of credit can be an ideal alternative to traditional loans. It allows you to borrow against assets like accounts receivable, inventory and equipment while only paying interest on what is used – an excellent way of managing cash flow and reducing volatility in your business.
Asset-based financing can be an ideal solution for companies with substantial gaps between cash outlays and receipts, such as manufacturing firms that must purchase raw material before production but won’t receive payment until 30-90 days post sale of their product.
Debt consolidation offers businesses a cost-effective and attractive alternative to debt packages that impose stringent financial covenants, freeing them up to focus more on achieving their business goals rather than worrying about legalese and compliance matters.
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Businesses with extensive assets to use as collateral can benefit from asset based financing. While traditional lenders consider profitability and cash flow when underwriting loans, asset based lenders use collateral value as criteria to evaluate loan applications – this makes it easier for companies with variable cash flow or poor credit histories to secure funds.
Asset based lending provides more flexible financing at more reasonable interest rates than traditional loans, with financing amounts determined based on liquid assets owned by borrowers such as inventory and accounts receivable versus traditional loan collateral. ABL lenders can quickly adapt to changing working capital cycles as well as provide flexibility during growth situations; it’s an attractive solution for many types of businesses such as distribution companies with seasonal or cyclical sales cycles and retailers experiencing fluctuations in revenues.