Asset-based lending (ABL) is a form of financing that uses physical assets as collateral, such as inventory or property, in its approval process compared with traditional bank loans.
Businesses with seasonal or highly cyclical revenues will find this tool particularly helpful, as it can smooth out cash flow fluctuations by taking advantage of existing fixed assets to bolster cash flows during periods of instability.
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Contrasting with traditional loans that look solely at cash flow as the main consideration, asset-based lending looks at the value of collateral as its main consideration. This type of funding may be more flexible and easier to qualify for than other forms of finance such as unsecured business loans.
Businesses struggling to meet their financial covenants often turn to asset-backed lending as a viable solution. ABL lenders understand specific industries’ nuances and know how to manage complex transactions efficiently, which helps reduce risks in times of emergency.
Inventory and accounts receivable are the cornerstone of an ABL facility; however, certain lenders may provide extra liquidity with marketable securities such as bonds, certificates of deposit, or publicly traded stocks – this type of marketable security may provide even greater flexibility.
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Asset based lending stands in stark contrast to traditional bank financing options that focus on creditworthiness and financial performance, by being secured primarily by collateral assets like accounts receivable, inventory, marketable securities, real estate or intellectual property as collateral. Furthermore, minimum revenue requirements may be much lower with asset-based loans than with traditional financing solutions from traditional banks.
Although credit shouldn’t be the primary deciding factor for eligibility, lenders still evaluate a company’s historical financial statements and cash flow to minimize risk. ABL facilities also allow businesses to use funds for any purpose within their business; making it an excellent solution for fast growing or struggling enterprises that need turnaround or recovery assistance. Lenders of ABL facilities also require monthly reporting on their borrowing base.
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Asset-based lending provides several advantages, such as competitive interest rates and flexibility. Loans secured with business assets like inventory, accounts receivable, and equipment help mitigate risk for lenders while also making this type of financing an appealing solution for small businesses with unstable cash flow or poor credit histories. There are fewer restrictive covenant requirements compared with traditional loan products; however certain specialty items or perishable goods may not qualify as collateral and lenders may decline them due to depreciation rates.
Multiple factors determine your eligibility for asset-based lending, including the value of your assets, financial covenants, and your credit history. As an example, asset-based financing might be possible if you own marketable securities worth at least $120,000.
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Asset-based loans typically work as revolving lines of credit, meaning their amounts available can expand and contract as your company’s assets fluctuate – an ideal solution for companies with variable cash flows or seasonal revenue.
Most financing solutions, including banks and non-bank lenders, include covenants that companies must abide by in order to maintain operational lines. This typically includes maintaining certain financial ratios or receiving monthly certifications; non-bank lenders tend to be more lenient with these requirements and put greater weight on future prospects of your business.
Some assets may not qualify as collateral for an ABL, such as specialized goods or perishable inventory; nonetheless, application processes tend to be faster for asset-based loans than for traditional bank loans.
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Asset-based financing offers businesses many benefits for accounts receivable, inventory and other physical assets. Lenders typically conduct field evaluations or third-party appraisals of collateralized assets to assess quality and value; some specialized goods or perishable inventory may not qualify as acceptable collateral.
Asset-based financing not only boasts lower interest rates and an easier application process than traditional loans, but its focus on collateral allows it to serve a broader range of businesses than bank lines of credit, which are usually limited to those with strong financial statements and proven performance history.