Asset Based Lending
An asset based loan (ABL) is a type of business financing that is secured by company assets. Usually structured as a revolving line of credit, asset based lending allows a business to borrow against their financial assets on an ongoing basis to cover cash flow needs.
Who Uses Asset Based Loans?
Asset based loans are used by companies that need working capital, often due to rapid growth. Asset based lenders help to position their clients for success and assist them in managing rapid growth issues.
What Collateral is Required by Asset Based Lenders?
Acceptable collateral for most asset based loans (ABLs) includes accounts receivable, inventory, business equipment, and factory machinery. Appropriate inventory can include both finished goods and marketable raw products. In some cases, certain personal assets of the business owners may be requested as collateral.
- Accounts receivable is the most popular type of collateral because it is liquid and has a pre-set value.
- Inventory takes second place because it lacks the stable value and liquidity of accounts receivable.
- Manufacturing machinery and business equipment can be used as collateral for asset based lending approval, although they are usually more helpful for obtaining a term loan. Their worth as collateral is longer lasting and equal to the duration of their useful operation.
- Trademarks and customer lists also can be used as collateral for some ABLs.
Since both accounts receivable and inventory are renewed throughout the year at periodic intervals, they are in the most-favored classification of eligible collateral.
When is Asset Based Lending Used Used
Midsized and large companies of all types use ABL for a variety of purposes:
- Working capital
- Turnaround financing
- Capital expenditures
- Debtor-in-possession (DIP) financing
- Leveraged employee stock ownership plan (ESOP)
Benefits of Asset Based Loans
As a borrower, using ABL can provide a range of benefits:
- Increasing your borrowing power, especially when your earnings and cash flow are seasonal or unpredictable
- Enhancing discipline and efficiency around accounts receivables and production for more borrowing capacity
- Reducing financial covenants, including restrictions around the level of debt-to-enterprise value or cash flow, and net-worth-focused covenants
- Potentially gaining more time to address financial difficulties due to built-in collateral protection