An asset-based line of credit offers businesses that rely heavily on accounts receivable a great source of financing. Backed by your receivables deposited at a lender bank and held as collateral, an asset-based line can help your business access financing quickly and affordably.
Value of collateral used to determine eligibility and loan terms; typically lenders prefer liquid assets which can easily be converted to cash.
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Asset based finance provides companies that rely on an ongoing cash conversion cycle of inventory purchases, financing accounts receivable and selling into accounts payable with an advantage. Typically these types of companies feature higher loan-to-value collateral ratios and lower debt service payments than traditional lenders; however they will be required to submit monthly reports that include field inspection of inventory, real estate and machinery & equipment.
Some businesses may have substantial equity and cash flow but require additional capital for growth, working capital maintenance or equipment purchases. Such companies could benefit from asset based lending as opposed to traditional business financing which takes into account creditworthiness, profitability and cash flow – potentially helping avoid covenants which limit credit availability or increase rates during a downturn.
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Asset Based Lending, or ABL, may provide an ideal financing solution for some businesses that requires more than traditional cash flow-focused funding solutions. ABL lenders instead focus on assets like accounts receivable, inventory and equipment held by their borrower allowing them to take advantage of growth opportunities without being restricted by strict cash-flow covenants.
Companies needing working capital to meet seasonal and cyclical fluctuations in sales, retailers with fluctuating inventory levels and production, or asset-rich firms may benefit from asset-backed lending (ABL). Because these types of companies monitor asset values on an ongoing basis, ABL lenders tend to be more accommodating and less concerned about covenant defaults compared with cash-flow lenders. Companies looking for flexible working capital facilities could use ABL for acquisition financing and dividend recapitalization purposes as well.
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ABL loans can provide vital working capital for companies facing highly leveraged situations or needing turnaround or recovery efforts, and may serve as an ideal alternative to bank loans for those lacking sufficient credit history to qualify for them.
Contrary to traditional bank loans, which primarily focus on cash flow, ABL lenders prioritize asset valuation. This makes approval easier even if your credit history has been less-than-stellar.
ABL lenders typically require fewer financial covenants than banks, giving you greater flexibility in managing cash flow. Under purchase order financing, an ABL lender can control customer payments made to your company by placing them into a lockbox account monitored by them.
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Asset based lending can be an efficient means of financing business operations. As an alternative to traditional business financing arrangements where lenders primarily consider cash flow and historical profitability, asset based lending provides businesses with a flexible and customizable tool that can help manage seasonal cash flow fluctuations or take advantage of growth opportunities. Furthermore, asset based loans can also be utilized by organizations looking to recapitalize their balance sheets or make dividend payments.
Asset-based financing involves lenders taking an asset-value approach when providing credit facilities; this option can be particularly helpful for industries that rely heavily on inventory such as manufacturing or retail. Furthermore, asset based finance may help companies that experience seasonal earnings fluctuations that cause inventory expansion or contraction to expand or contract over time.
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Asset based financing offers many advantages, including quick access to capital and lower interest rates than unsecured loans. Unfortunately, however, asset based lending also poses risks that could cause you to default or even lose assets.
Asset-based lenders provide financing against the value of assets owned by a business, such as accounts receivable, inventory, equipment or real estate. Asset based loans must have high quality assets with consistent collections history that are readily marketable without obsolescence or perishability concerns. Most asset based loans come in the form of revolving lines of credit that increase in availability as the value of underlying assets increase.