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Asset-based lending is usually more suitable for large companies that have a lot of assets, but also need regular cash flow for accepting new contracts or when expanding their business further. This usually means that you can borrow in the millions. When would this be useful? Not only can asset-based lending be used in restructuring and establishing new branches of a company, for example, it can also be used for management buy-ins and management buy-outs. You can use this type of lending for most business purposes, so it should always be considered along with other traditional forms of loans. Top tips to getting the best loan Always be truthful with your lender Compare all of your options Make sure that you understand the terms and conditions Get advice at the right time Make full use of your assets if it makes sense for your business Be truthful with your lender First of all, you should always make sure that you are honest with your potential lender. Why? Most importantly, if you are misleading with your figures or you try and shine a better light on your business after the lender does their due diligence you may end up missing out on a loan that you could have been given if you had been truthful.
What type of collateral is used for Asset-Based Lending? Asset-backed loans enable companies to utilize a variety of collateral options for security. Although there is a long list of collateral options that can be used, there are some that are weighted more heavily than others. Accounts Receivable (A/R) – Once services have been rendered and a sale is official, an invoice is created and sent to customers. For a majority of asset loans the invoices of a business are the primary asset that secures the asset-based line of credit or asset backed term loan. The LTV or loan to value can range, but average advance rates are 90% of the invoice amount. There are numerous items that affect the advance rate on an invoice. Some of these variables are the time it takes a customer to pay, payment terms that product is sold on, credit strength of each customer, and the concentration or diversification of your customer base. Inventory – Inventory is a core asset that can be used when looking to collateralize an asset based loan.
Fixed assets include property, machinery and other equipment. Intangible assets include the value of brand names and trademarks. Who uses this type of lending? The asset based lending industry originated in the US, and expanded to our shores in the late 1990s. It has become increasingly popular since the last recession, as traditional lending has become increasingly hard to secure. ABL is a popular alternative to bank lending as it can provide more flexibility, and it is scaleable – so a lending facility can evolve as the demands of the client change. Unlike a traditional overdraft, an ABL facility is unlikely to be withdrawn at short notice. So, is ABL something small business owners should look into? Probably not – unless you have a high turnover, and significant value tied up in your business assets. Unlike invoice-based products, asset based lending is typically aimed at larger companies and is often used to finance mergers & acquisitions, restructuring and management buy outs – situations which are clearly more relevant to established firms rather than your typical SME.
If you're approved, be aware that your lender may perform periodic audits of your collateral to continuously assess value. Asset Based Financing Pros and Cons Before you decide if ABL is right for you, consider the risks and benefits of asset based lending. Pros Asset backed loans are more accessible than their cash flow counterparts A business that has assets on the balance sheet can put these investments to good use and secure additional funding for growth Cons Not all assets qualify as collateral; for an optimal loan-to-value ratio, lenders look for high liquidity and low depreciation rates. Due to the thorough due-diligence process, obtaining an ABL takes time, so it's not the best option if you need immediate access to capital There is the risk of losing your assets in the event of default Elise Moores Managing Editor at Fast Capital 360 Elise Moores is the Managing Editor at Fast Capital 360, reporting on all things small business. She distills complex topics into consumable bites so you, the business owner, can make better decisions.