What is Asset Based Lending?
Asset based lending, frequently called “ABL”, is a type of loan that is secured by various types of collateral. Most commonly used by businesses, asset-based loans are typically secured by accounts receivable, inventory, equipment or real estate. Whereas banks typically approve loans based on a proven record of predictable cash flow, asset-based lender’s approach to underwriting is more reliant on the collateral coverage for repayment. This often allows ABL lenders the ability to approve an asset-based loan where a bank would not.
Why use Asset Based Lending?
Most asset-based loans are structured to work as revolving lines of credit, allowing the company to borrow as needed and on a continuing basis. This provides a continual stream of cash for operations, expenses and investments and can generally bridge gaps between outgoing cash for operations and incoming cash from payments.
What are the benefits of using Asset Based Loans?
Borrowing Capacity Growth
As you grow and acquire additional assets (equipment, accounts receivable, inventory, real estate), the asset base of the loan grows, thus providing increases in the availability under the line of credit, which then enables you to make purchases and increase or improve operations.
Flexibility in Use of Proceeds
Many traditional bank loans are approved for a specific purpose or use of funds (equipment acquisition, for example) and therefore the proceeds cannot be used for other expenditures. Funds borrowed from an ABL can be used for any business purpose, and therefore at the discretion of the company.
Faster Approval Times
Asset-based lenders typically approve loans faster than a bank will approve a traditional business loan. The lender will evaluate the collateral being pledged, but because the approval isn’t based solely on historical financial statements or predictable cash flow, review and documentation is often faster.
For Companies with High Debt-to-Worth Ratios
When banks review loan applications, they have specific ratios and loan covenants that must be met. Companies with high debt-to-worth ratios may fall outside the banks’ allowed credit approval criteria. Non-bank asset based lenders are not subject to these constraints and can therefore approve an asset based loan structure much easier with more weight on the collateral and future prospects of the business.
Improved Cash Flow
Asset based loans can improve your company’s cash flow by smoothing the peaks and valleys brought about by the timing differences between the expenditures and receipt of cash. Funds can be used to purchase inventory or raw material ahead of production and sales. Or, when using accounts receivables as the collateral, you have access to funds without having to wait the typical 30-90 days for reimbursement of contract payments.
Loan Structure Flexibility
Loan structure for ABL is dependent upon the capital intensity of your business. We can provide financing using different assets, such as accounts receivable, inventory, equipment, and real estate. Structure and asset mix depend on the assets available and the needs of the company.
What are minimum requirements to qualify for ABL?
Asset based loans are a great alternative for rapidly growing companies, or those that are highly leveraged, undercapitalized, in turnaround or recovery cycles, or otherwise not bankable. Large pharmacy networks, or pharmacies in certain classes of trade (i.e., long term care) can have cash tied up in receivables and inventory. If your pharmacy has accounts receivables of $500,000 or more and has been in business for at least two years, you are a candidate for an asset based lending facility.
