Asset based lending has quickly become an attractive financing solution for companies of all sizes, offering companies access to funds needed for growth, turnaround or working capital support at competitive prices. Asset-backed loans typically feature well-collateralized facilities that are competitively priced.
Loans are structured as revolving lines of credit that leverage accounts receivable, inventory, or real estate assets as collateral and monitored through a monthly borrowing base certificate submission.
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Asset based lending can provide a powerful solution for cash flow challenges and growth situations, providing access to a larger borrowing base than uncollateralized business loans at more competitive pricing, with less restrictive covenants and an open repayment schedule.
Accounts receivable and inventory are two common assets used for asset-backed financing, with lenders assigning an advance rate or Loan-to-Value (LTV) depending on factors like length of time it takes a customer to pay, payment terms that product was sold on, and customer credit strength.
Equipment and machinery are popular collateral choices for asset-based financing programs, with lenders typically assessing a piece’s worth based on factors like make, model, year and condition of its asset.
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Asset-based financing differs from traditional business lending in that you use your assets primarily as collateral when applying for a loan or line of credit. This may include accounts receivable, inventory, machinery and equipment, real estate and intellectual property – although field examinations or inventory appraisals may be necessary depending on what form of collateral is used.
Businesses experiencing seasonal or cyclical variations in sales, ABL can free up more capital than cash-flow formulas allow. This applies to manufacturers, retailers, and companies exposed to commodity price volatility.
Asset-based lenders tend to have more relaxed financial covenants than other sources, making them an excellent option for borrowers with uncertain cash flows and poor credit histories. Furthermore, asset-based lenders may approve loans and lines of credit more quickly.
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Asset based loans offer companies in need of additional working capital an ideal solution, or as financing for turnaround or acquisition. You can obtain them from banks, finance companies and factoring firms and they typically come with flexible terms and repayment schedules at lower costs than traditional bank financing options.
To qualify for an asset based loan, companies must present detailed and accurate financial statements as well as credit insurance and a personal guarantee from its owner(s).
A company’s eligibility for an asset-backed loan depends on the nature and value of its collateral; accounts receivables and inventory tend to make excellent collateral assets, so lenders will conduct an appraisal to assess their eligibility for financing.
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ABL financing has long been used as a viable solution for companies needing working capital. ABL utilises physical assets of the business as collateral against lines of credit or revolving business loans; accounts receivable and inventory often serve as the main sources of collateral used under an ABL program, making this financing choice ideal for seasonal businesses that rely heavily on accounts receivable/inventory fluctuations for sales or seasonal fluctuations.
Contrasting traditional business loans, asset-based financing programs tend to impose less restrictions on how the funds may be spent than traditional loans do, often offering lower interest rates than factoring or other alternative financial products such as leasing. They require less paperwork as well and help smooth cash flow by mitigating variances between spending and receiving cash from customers.
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Asset-based financing differs from traditional lending by placing less emphasis on creditworthiness and cash flow; rather it focuses on the value of collateral assets as its basis of financing. This makes asset-based financing an attractive financing solution for companies with valuable collateral that may not qualify for other loans or lines of credit; additionally it has less restrictive covenants saving time and effort when seeking funding solutions.
Businesses seeking an asset-based loan may use accounts receivable, inventory, real estate and intellectual property assets as collateral. Furthermore, they offer more flexibility and lower fees compared to traditional forms of financing such as factoring. It’s important to recognize the risks involved with an asset-based loan as defaulting will force lenders to seize your business’s assets to cover your debt.