Small business loans from traditional lenders may be one of the most recognized forms of business funding, but they are certainly not the only way for firms to secure much-needed financing. Asset-based lending (ABL) is often a path to working capital for companies without the standard collateral required for bank loans.
What is asset-based lending?
Asset-based lending is a type of loan that is secured by the assets of a company. While traditional small business loans require collateral like real estate or heavy-duty machinery and equipment, ABL allows for much more flexible collateral. ABL lenders will accept things like the value of accounts receivable, unsold but finished goods inventory, major purchase orders, or raw materials inventory. ABL is unique because the value of these assets can change over time.
Features of asset-based lending
Higher Risk, Higher Rates
Most lenders do not want to deal with collateral that has variable value as it poses a greater risk. Because ABL lenders are willing to deal with the increased risk they charge higher interest rates than traditional bank loans. While small businesses must consider the cost of that added interest, they also must factor in savings in getting a loan quicker and easier than with a standard loan. Plus they may be able to get more cash quickly with an ABL loan which can be up to about 80 percent of accounts receivable and 60 percent of inventory.
Securing an ABL Loan
ABL lenders will look for companies that have solid financial basics. Business owners should come prepared with financial statements, lists of frequently sold inventory and customers with a history of paying their bills on time. Once a small business has been accepted for an ABL loan, the money can be disbursed in a single sum, or more commonly, it is available as a revolving line of credit.
While ABL is a means of leveraging future profits for cash today, in the right circumstances it can still be a great tool for small firms to obtain the working capital they need to finance their business demands on their way to better days.