Businesses with significant asset values may find asset-based lending more appealing than traditional financing solutions, since these loans typically involve an extensive assessment and evaluation of your physical assets such as inventory, equipment, properties or intellectual property.
These loans may be cheaper and easier to approve than high-leverage debt packages that rely on cash flow alone, providing relief from seasonal cash flow fluctuations or supporting growth prospects.
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Use of business assets as collateral reduces lender risk, helping you qualify for loans with lower interest rates. Examples of collateral could be inventory, accounts receivable and equipment. Some assets may not be suitable as collateral such as specialized goods or perishable inventory that cannot be easily sold off.
Asset-based lending can also provide greater flexibility than traditional cash flow financing and reduce financial covenants a company must fulfill to remain eligible for credit. A wine and liquor wholesaler that experiences seasonal fluctuations in sales would likely benefit from having an asset-based line of credit that can be drawn on as needed; this allows them to cover operating expenses or address cash flow gaps more quickly and efficiently.
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Companies with significant assets can use them to secure financing and meet operations and growth needs, unlike cash flow lending programs that primarily look at cash flows. Instead, asset-based financing programs focus on collateral value; making them ideal for companies with variable cashflow requirements.
Asset Based Lending (ABL) may not be suitable for certain assets, including customized inventory requiring extensive customization or perishable goods. Furthermore, lenders may require monthly reports regarding the status of assets financed with ABL facilities, which could add costs and time. Automated reporting could reduce this expense significantly.
ABL gives businesses greater flexibility than traditional financing, which often comes with strict financial covenants that obligate them to maintain certain levels of debt coverage or liquidity. Such requirements make it hard to adapt quickly to changing market conditions – for instance during a pandemic like Coronavirus, sales may fall dramatically without warning. ABL can provide greater freedom and adaptability.
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An asset-based loan is a form of secured financing which uses assets owned by a business as collateral. Examples of assets used as collateral may include equipment, inventory and accounts receivable. Asset-based loans often have lower interest rates than unsecured loans as well as less stringent covenant structures and flexible repayment terms with shorter maturity periods.
Asset-based lending reduces the importance of creditworthiness for qualifying companies as it utilizes asset value as the primary criterion. Borrowers still must submit monthly reports and undergo periodic field examinations and appraisals of the asset collateral as part of qualification criteria for this form of finance.
TSL recently spoke with several nonbank regional asset-based lenders whose CEOs discussed the current state of their industry, their outlook for 2018, and how COVID has affected them.
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Asset-based lines of credit can be an ideal solution for companies needing to boost cash flow or go through a turnaround, yet these loans have stringent eligibility criteria; lenders will consider your financial statement and performance history, while also considering any collateral you put up as security – some assets, like specialty goods or perishable inventory may not qualify.
Interest rates on secured lines of credit vary based on the nature and value of collateral used as security. Furthermore, fees associated with initial underwriting as well as assessment and monitoring of assets can add up quickly; nonetheless, this type of financing can be extremely useful to businesses looking to finance growth without traditional bank loans being available to them.
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Asset-based lending differs from traditional business financing in that it doesn’t rely on cash flow as the basis of approval; asset-based loans instead use collateral instead, making them especially helpful for companies with fluctuating sales patterns or seasonality issues, providing access to capital without strict covenant structures or long waiting lists for approval.
Manufacturers of truck trailers could potentially experience economic slowdowns that reduce freight hauling demand and orders for new truck tractors, leading to orders falling off for freight transport services and new truck tractors being ordered less frequently. An ABL structure allows them to access working capital through draws on a revolving line of credit while remaining covenant free borrowing base.
ABL loans can be particularly advantageous to companies with assets that are easily convertible to cash, such as marketable securities and real estate. An ABL may prove less costly than debt packages based on cash flow calculations while unlocking more capital than these formulas allow.