An Asset backed loans (ABL) is a type of business financing that is secured by company assets. Most asset based loans are structured to work as revolving lines of credit. This structuring allows a company to borrow from assets on an ongoing basis to cover expenses or investments as needed.
Who uses asset based loans?
Asset backed loans are used by companies that need working capital to operate or grow. Often, companies that request an ABL have cash flow problems. However, many of these cash flow problems stem from rapid growth. The asset based lending facility helps companies manage the rapid growth issues and positions the company for growth.
Who qualifies for asset based lending?
Generally, asset based financing is offered to small and mid-sized companies that are stable and have assets that can be financed. The company’s assets must not be pledged as collateral to another lender. If they are pledged to another lender, the other lender must agree to subordinate its position. Also, the company must not have any serious accounting, legal, or tax issues which could encumber the assets.
Most asset based loans have a minimum of $750,000 to $1,000,000 in utilization requirements.
What assets can be used as collateral?
The main collateral for an asset based loan is usually accounts receivable. However, other collateral such as inventory, equipment, and other assets can also be used.
What is the borrowing base? How is it determined?
The borrowing base is the amount of money that the asset based lending company lets you borrow. The borrowing base is determined as a percentage of the value of the collateral that has been pledged. Generally, companies can borrow 75% – 85% of the value of their accounts receivable. The borrowing base of inventory and equipment is often 50% or less.
Asset based lenders inspect ledgers and assets regularly to determine and update the value of the borrowing base. Since it often involves accounts receivable, the borrowing base fluctuates.
How does the due diligence process work?
Before offering a loan, the lender needs to complete its due diligence process. During due diligence, the lender calculates the value of your collateral, determines if there are any encumbrances on the collateral, and inspects the accounting book. Lenders often do an onsite visit and speak to relevant employees.
Lenders often charge for the site visit and collateral evaluations, though costs vary.
What is the cost of an ABL?
The cost of an asset based loan is determined by the size of the loan, the type of collateral, and general risk. Most loans are priced using an annual percentage rate (APR). However, charges for other services are also common.
The APR of an ABL ranges from 7% to 17%.
How is an asset based loan different from factoring?
Asset based loans are often confused with factoring. These products are different but provide similar benefits. Part of the confusion stems from the fact that both products use accounts receivable as their main collateral.
However, there are important differences. In a factoring transaction, the company does not borrow money. It sells its receivables to improve its cash flow. Receivables are sold and ledgered individually, rather than financed in bulk.
Lastly, the factoring company is involved in the collections process. This allows the finance company to work with smaller companies – or troubled companies – who would not qualify for an asset based loan. To learn more, read “Asset Based Loans vs. Factoring.”
Which product is better, factoring or an ABL?
There is no better product, per se. The “better” solution depends on your corporate needs, the type of collateral you have, the size of your company, and the general risk of the transaction.
Larger companies tend to prefer asset based loans due to the lower ongoing cost and flexibility. Smaller companies tend to prefer factoring because it has low due diligence costs and is easier to obtain.