Asset Based Lending (ABL) refers to loans which are secured by an asset, meaning that if these loans are defaulted, the asset is taken. It refers to the business of loaning money in an agreement secured by collateral. Asset based loans are typically secured by inventory, accounts receivable, machinery and equipment.
Also known as asset-based financing or commercial finance. The assets used as collateral have to either be worth the same amount or more than the amount being requested as a loan.
How Asset Based Lending works
Businesses often take out loans or other forms of credit finance to meet its cash flow demands. However, if the company cannot show enough cash flow or assets to cover the loan, the lender may use available physical assets as collateral.
The loan terms and conditions of an asset based loan depend on the type and value of the assets offered as security. Lenders prefer highly liquid collateral as securities that can be easily converted to cash in case of default payments. These loans are considered less risky than unsecured loans as the lender by selling the collateral in cases of default payments.
Asset Based lending vs Secured Business Loans
Asset based lending and secured business loans are quite similar, the only difference being the amount being granted as loans. Asset based lending amounts are determined based on the value of the business assets such as accounts receivables or real estate.
Secured business loans are often backed by one specific asset like a piece of equipment or furniture. The amount received from a secured business loan is often used to purchase the asset which is used as collateral.
As such, asset based lending while resembling conventional secured loans can be taken out on more than one assets owned by a business on the other hand secured loans can only be collected against one asset.
Benefits of Asset Based Lending
1. Easily Obtainable:
It is common knowledge that securing business credit finance may be difficult especially for small businesses. This is because before these loans are given, these lenders take time to review the income and profitability of the business, its credit score before deciding on whether or not to grant these businesses the requested loan.
As a result, the long process of trying of reviewing the business’ application and qualification would delay the business from receiving these funds especially if the money is quite urgent. As a result, asset based lending provides an option to this. As it is concerned with assets over profile, that is the company’s assets over its credit score or profitability, all the business needs is ownership of assets which are equal to, or over the amount requested as loan.
2.Low Interest Rates:
Unlike unsecured bank loans, low interest rates are charged on asset based lending. This is because the lenders do not face as much risks as they would with unsecured credit finance. The value of the asset which the business borrows against is often equal to or more than the amount being granted as a loan.
As a result, in case of default, the lenders bear no risk as the property can easily be sold off and the amount received used to cover for the default loan. Hence, there is no need for lenders to charge high interest on the loan granted, which means that the amount to be repaid by the business is less than would have been repaid if the business had taken out an unsecured loan.
Asset based lending is more flexible than many other forms of credit finance. That is there are fewer limitations or constraints to asst based loans. That is, once the funds are given to the business, it is the business’ decision to decide how it would be utilized, that is, the business could choose to use the funds for its initial purpose, or invest it in a different one.
As the business’ sales and value of receivable asset grows, the amount of financing also increases. This is because financing is based on the accounts receivable and assets of the business. Hence, applying for new loans is easier and you are eligible to get even more money. This is perfect for fast growing businesses that require working capital to keep up.
Often, businesses that opt for asset based lending are small and medium scale enterprises which are often not liable for other forms of bank finance because their profiles do not match those which these banks usually consider. They usually do not have credit history and their income revenue is usually small.
As a result, searching for an alternative source of finance, they turn to asset based lending. By establishing their creditworthiness with an asset based lender, their business credit is built which make them qualify for other financing opportunities thus increasing their access to working capital. Hence, rather than having to begin sourcing for funds, the business can now apply for this credit finance and focus would be turned to managing the business’ operations.
5.Funding When Needed:
Funds are very important to every business as it is required for the business to effectively carry out its operations. Sometimes, it may be difficult to amass the required funds, especially for small and medium scale enterprises.
Asset based loans are obtained faster than other bank loans. The process of obtaining asset based loans takes little time, the bulk of time Is spent underwriting the assets, once this has been completed, it takes a few days for you to receive the income. This access to quick working capital allows you keep up with your business expenses allowing for smooth operation of the business.
Asset based lending provides businesses with the funds required for the running of the day-to-day operations. When businesses are strapped for cash especially small or medium scale enterprises, they could collect asset based loans, using their assets as collateral. Asset based lending could also be viewed as a form of secured loan.