If your company has assets aplenty but cash flow seems to be limited when you need it most, asset-based lending (ABL) may be the solution to your problems. If you are exploring your working capital financing options, ready to take your company to the next level, or just trying to find a business loan that offers more flexibility than most, keep reading to learn more about ABL and understand if it is right for you.
What is ABL?
Asset-based lending is a flexible business financing option in which the borrower uses the business’s assets as collateral for the loan. Asset-based lending can take the form of a revolving loan or line of credit. It differs from a traditional loan or credit line in that the credit limit is based on your assets and cash flow, not your company’s credit score.
Businesses often need to take out a loan or open lines of credit as a means to cover operational expenses or invest in growth opportunities but may be faced with pre-approved limits based on the evaluation of their finances and creditworthiness. ABL is a great option as it relies on the assets put up for collateral and the creditworthiness of your customers. Companies who have reached their credit limit can potentially increase their borrowing cap by offering additional assets as collateral.
An appealing aspect of asset-based lending is that many of these loans have fewer covenants than other financing options. In traditional business financing, covenants regarding leveraging and cash flows are in place to mitigate the risk of default. Since asset-based loans are backed by consistently-monitored assets, the level of risk decreases for the lender, giving the borrower more flexibility.
How Does Asset-Based Lending Work?
Asset Evaluation
The asset-based lending process includes the lender reviewing your balance sheet and determining which assets are most appropriate to collateralize. The first asset considered is frequently the current accounts receivable. Lenders typically prefer to underwrite the most liquid assets first, so the remaining order is often inventory, equipment, real estate, and even intellectual property, in rare instances. The lender will then work to appraise the quality of assets to ensure the value listed on the balance sheet is consistent with the actual value of the asset. Note that the assets being leveraged for an asset-based loan should not be utilized as collateral elsewhere.
After the assets have been evaluated, the lender will determine what percentage of the asset’s value they will offer as a revolving loan or line of credit. The more liquid an asset is, the greater the value of the loan will be. For instance, if you seek a $500,000 loan and put up current accounts receivable of the same value, you may receive 80% of the AR’s face value. This means you will receive a loan of $400,000. On the other hand, if you seek a $500,000 loan and put up very specialized equipment valued at that amount, you may only receive credit worth 50%, or $250,000, to be used at any given time.
ABL in Action
Once the assets have been evaluated and the loan amount has been approved, the borrower may use the capital within the loan as needed and then pay off and re-borrow the funds, similar to a line of credit. Lenders will require periodic, often monthly, reports on the status of the collateral to ensure it maintains its value.
The Cost of ABL
Asset-based loans typically have an annual percentage rate (APR) of 7%-17%, but the exact rate is determined by the loan amount, the risk involved, and the form of collateral. You may also find that some lenders add fees for administrative services, because ABL requires more involvement and additional monitoring than traditional cash-flow loans.
Not All Assets Are Considered Equal
Although some assets may hold a lot of value for the borrower’s company, they may be too niche for the lender to resell in the unfortunate instance of default. For example, construction equipment can range from standard machinery like excavators and bulldozers to highly specialized equipment designed for specific tasks or industries, such as equipment used for tunneling, underwater construction, or specialized lifting and rigging operations.
Niche equipment assets often have limited market demand due to their specialized nature and application. Banks and traditional financial institutions may find it difficult to accurately assess their value or identify potential buyers in case of default or repossession.
Who Uses ABL?
Both established companies and startups can benefit from ABL, as it offers flexibility and solutions tailored to their specific needs. ABL can be used for companies that need help covering the expenses of daily operations or for companies in need of funding to invest in growth. Examples of industries that commonly use ABL include manufacturing, wholesale and distribution, transportation, and staffing. Many seasonal industries also rely on asset-based lending as it can help bridge the gap between off-seasons and busy times of the year.
Love Your Lender: TAB Bank ABL Opportunities
When it comes to asset-based lending, you will be working closely with your lender to set up your loan and consistently monitor your assets. Work with a lender who understands your business’s unique needs and is rooting for your success. At TAB Bank, we offer the experience and care of a dedicated relationship manager for all our ABL clients.
Whether you are looking to cover the day-to-day expenses of your business or are ready to unlock an exciting period of growth, TAB Bank is here to assist you and your business in reaching its goals. Learn more about TAB Bank’s Asset-Based Lending opportunities today.
