Asset-Based Lending: The Ultimate Guide to Help Your Business in February 2024
Asset-Based Lending (ABL), also known as asset-based loaning, is a type of loan where lenders finance businesses using an asset to secure the funding. The assets used as collateral are commonly inventory, but not limited to this, which lenders then take into account to base the value of your loan. They can then be paid off with an interest rate between 2% and 7%, or the assets are seized. ABL is especially useful for new businesses and those with a poor credit history.
Asset-Based Lending: What is it?
As mentioned above, ABL is a loan that businesses can take out to rent a space, maintain a facility, hire employees or order new products to sell. The idea is to show banks that financing the business will be a reliable deal because there are assets involved to reflect their integrity and also serve as collateral should the company, for any reason, fail to pay the loan off promptly or at all.
This is a stark contrast to cash-flow lending, which considers your sales history of creating an estimate for future projected sales. As a result, ABL is an essential alternative for new businesses with little history or unsuccessful businesses looking to develop but cannot find a lender due to their past sales.
An asset for a business is an entity that holds value so that lenders like a bank can see that financing a company is worthwhile and not a risk. An example of this is receivables, which is money that their clients own a company from any products or work they have purchased or received, that has not been paid yet. Another famous example is inventory, which can be anything from raw materials to finished stock, that can be sold for profit. Other assets that businesses can use for ABL include equipment, machinery, and property.
Some benefits of business loans include:
- Working capital support
- Easy to apply for
- No profit sharing
- No collateral required
- Reasonable interest rates
- Tax benefits
- Working capital support
- Multiple loan options
Asset-Based Lending: How Does it Work?
If you believe that ABL is the best option for your business, you must first understand how to process generally goes. Firstly, you must decide which assets you wish to use, which could be inventory, property, equipment or any other entity of value. After this, your lender will review the asset and its current value, which they would usually only agree to lend up to 80% of the cash value. The loan is then finalized, and the business can receive its funding, which it must then pay off in correspondence to the terms arranged, with interest.
ABL is usually termed as ‘revolving’, meaning that once money is borrowed and paid off, the arrangement can continue in an ongoing fashion until the company can finance itself independently. However, if your asset is receivables, the process differs slightly. Because there are no physical funds to give a lender if your customers have not yet paid off their debts, you can show the invoices you have managed so far, which the lender will value.
What Are The Advantages and Disadvantages?
ABL has many benefits because they allow certain businesses to access a loan that they may not have been eligible for otherwise. As they focus on your existing assets instead of your cash flow, start-up businesses will be able to give buildings, machinery or stock as collateral to demonstrate to a lender their reliability. Additionally, as the value of your assets increases, the lender can increase your funding, which is especially relevant when using real estate as collateral. This flexibility is appealing to companies that wish to receive funding.
Even though ABL has many advantages, some drawbacks must be considered to evaluate the business loan comprehensively. The most obvious disadvantage is that you risk your assets being converted to cash and renounced if you fail to pay your loan when you agree with your lender.
When this is a high-value asset such as your business building or stock, the business will struggle to continue its everyday operations, which is a severe risk to its future. Furthermore, many assets have a high depreciation rate, meaning that they cannot be used to secure a loan, or as they decrease in value, the amount you can borrow may also lessen.
|Business Loans in the UK
Direct funder – not a broker
|£8,000 – £500,000
Fast, hassle-free business finance from £10,000 to £500,000 at competitive, fixed rates
They will run pre-eligibility checks, without affecting your credit score
|4.9/5 Trustpilot rating
|Must be a limited company with 6+ months of trading
|Must have a min of 1 year trading
|Europes largest revenue finance provider
|Must take on a min of £3,000 per month of card transactions
|£3,000 sales per month
|No penalties for early or late repayments
|Only available to Limited companies in England/wales
|Lender & Broker
|Must be a limited company with 2+ years of trading
Asset-Based Lending – To Conclude
Overall, Asset-Based Lending is an ideal way to finance various elements of your business if your estimated future sales are poor or you have many high-value assets that you wish to use. Whilst this type of funding is a convenient alternative to cash-flow lending. Certain downsides must also be considered.
Funding options discuss obtaining business loans with bad credit in more detail here.
Other useful links about loans:
Understanding Small Business Loans
What is a Personal Guarantee?
Manufacturing Business Loans
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