Asset-based financing is an effective solution for companies that have much of their cash tied up in raw materials or finished goods inventory, or that have gaps between cash outlays and receipts. Unfortunately, the added fees associated with assessing and monitoring assets increase its cost considerably.
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An organization’s assets provide it with wealth that can be leveraged for financing purposes. Such assets might include inventory, accounts receivable and marketable securities. Secured loans tend to be lower risk than their unsecured counterparts and also have more flexible repayment schedules and covenant structures.
Companies with strong cash conversion cycles may be especially appealing to asset-based lenders. Furthermore, such firms could qualify for purchase order financing if their customer requires large quantities of materials and inventory to produce an order from them.
An ABL credit facility can offer additional flexibility to businesses that need to expand or transform their operations. Backed by liquid assets, these credit facilities tend to have less volatility and offer better liquidity profiles than long-term loans based on cash flow.
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Your company assets can serve as collateral for an asset-based lending facility, including accounts receivable, inventory, real estate or even intellectual property. When selecting your lender it’s essential they understand your industry in order to accurately value and monitor the status of your assets over time.
Asset-based financing can provide more flexible credit availability and fewer covenant requirements than conventional lines of credit, making them particularly appealing to businesses experiencing rapid growth or cyclicality. Asset-based lenders place greater weight on the value of your assets compared with traditional lenders – this makes qualifying easier if your credit history is poor, and may make payments or interest rates more manageable.
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Asset based lending provides companies that have difficulty qualifying for traditional business loans with an alternative financing solution that focuses on collateral’s value – an asset based loan could be the perfect fit!
Loans secured against assets like inventory, marketable securities and property, plant and equipment can help your business. In addition to more relaxed credit requirements and attractive interest rates than unsecured business loans, these loans often have less restrictive repayment terms and offer competitive interest rates as well as better flexibility than alternatives such as business lines of credit.
Financing via asset purchases is ideal for businesses that are growing rapidly, experiencing cash outlays that exceed cash receipts or seasonal fluctuations, or experiencing seasonality. A company’s ability to turn assets into cash should they default may dictate lending terms and conditions from lenders.
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Asset-based financing has many advantages over equity fundraising and allows companies to maintain ownership of their assets while remaining debt free. Furthermore, asset-based finance typically costs less than factoring. On the downside however, businesses needing this form of funding must report monthly on their borrowing bases, creating additional administrative hassle.
Contrasting traditional bank lending, which often relies on financial statements and cash flow for approval, an Asset-based Lender (ABL) looks more at customer creditworthiness and accounts receivable collections history as criteria for lending approval. A typical agreement grants the ABL control of a “lockbox” account through which customer payments may be sent – they then credit these funds against your borrowing base.
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As opposed to traditional loans, which rely solely on cash flow, asset-based lending programs rely heavily on collateral such as accounts receivable, inventory, equipment or real estate as security against defaulted loans. Failure to do so puts this value at stake – providing strong incentives for borrowers not to default.
ABL lenders also assess the liquidity of assets held by borrowers. They may require them to deposit customer payments directly into an “lockbox” account that the lender controls and monitors.
Additionally, ABL lenders tend to have less stringent credit requirements than conventional term loans; making them an excellent solution for businesses that are expanding rapidly or have had trouble in the past with finances.