How does Asset Based Lending Work?

May 25th, 2020

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There are several financing terms to be familiar with, and it’s possible to miss out on critical interpretations when we come across them in everyday use. Ones of such are Asset Based Loan/Lending (ABL). This form of lending is granted only to business entities and not consumers. It is often used by medium scale enterprises to cover short term cashflow demands.

What are Asset-Based Loans?

Asset-Based Loans are a type of business financing secured by company assets used as collateral. These loans may be secured by account receivables, inventory, or other property owned by a borrower. They are just loans based on the assets of the company, that are used as collateral.

This could also result in putting your future revenue on the line as a company to enjoy some money today.

How Asset-Based Loan Works

Many organizations often take out loans to meet scheduled cash flow obligations. For instance, a company might obtain a line of credit to make sure it can cover its monthly salary expenses even if there’s a slight delay in expected payments.

Upon seeking the loan, the business might be unable to show strong cash flow statements to cover a loan. The lender may propose to approve the loan with its assets as collateral. For example, a new bakery might be able to take a loan only by using its equipment to secure the loan.

The term and conditions of an asset-based loan usually depend on the type and value of assets offered as collateral. Lenders prefer highly liquid assets as collateral because that can be easily converted to cash if the borrower fails to meet its obligations. 

Who Uses Asset-Based Lending?

Asset-based loans are often used by organizations that need equity capital to operate or grow. Usually, organizations that request for this line of credit have cash flow problems. The asset-based lending facility enables the business to manage its cashflow problems effectively as well as positioning the company for growth.

Who Qualifies For Asset-Based Loans?

Generally, asset-based financing is given to small and mid-sized organizations that are solid and have enough assets that can be funded. The company’s assets must not be put up as collateral to another lender. In a case where they are pledged to a different lender, the other lender must agree to relieve some of the right on such collateral to the new lender. 

What Can Be Used As Collateral

The main collateral generally accepted for an asset-based loan is accounts receivable of the company. However, other loan security, such as inventory and equipment assets can also be used. These assets can later be used to recover non-performing loans in the event there’s a loan default.

Conclusion 

Before offering a loan, the lending institution needs to do a thorough due diligence process on the borrower. While the process of due diligence is on, the lender determines the value of your collateral. The lender also identifies any complications on the collateral and inspects the accounting records of the organization. Lenders carry out onsite visit and probe further by interviewing relevant employees.

The due diligence process is often subjected to a charge which varies from time to time and across different organizations. 

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