Asset-based lending (ABL) is a type of secured business loan that uses a company’s assets as collateral. These assets may include inventory, equipment, accounts receivable, and other balance sheets. The main collateral lenders accept is the accounts receivable because of its high liquidity.
Small to medium companies who are having some cash flow issues due to rapid business growth commonly use asset-based loans.
How Much Can You Borrow?
Generally, you can borrow from 40% to 85% of the total value of the pledged collateral. A lending company will usually let you borrow 75% to 80% for accounts receivable, but only 40% to 50% for inventory and equipment.
This is because inventory and equipment do not have a predefined value nor do they have the same liquidity as accounts receivable. It is also very difficult to determine their quality and value due to several factors like wear and tear.
You should note, however, that asset-based lenders regularly inspect ledgers and assets to update the value of your borrowing base, which is the amount they let you borrow so that it may fluctuate from time to time.
Benefits of ABL
Unlike traditional loans, companies without a long credit or revenue history can still qualify. Asset-based lenders do not concern themselves with your company’s history or credit scores. They are more interested in the future of your business, as well as how profitable they see it will become.
As long as you have a reliable and creditworthy customer base, you may qualify for a loan. This is why most young businesses turn to ABL as an immediate source of cash flow mostly used for business expansion.
There is also that added advantage of not needing to put up your home or any other personal asset as collateral for a loan.
ABL is a perfect way for small to medium companies with less-than-stellar revenue and credit history to get a quick influx of cash flow into their business. But before signing, make sure you understand all the risks and costs associated with this type of loan, so you do not get any unpleasant surprises in the future.