What is Asset-Based Financing?

Asset-based financing

What is Asset-Based Financing?

The majority of Asset-Based Loans are structured to operate like either a credit line or a term loan. The actual structure is based on the underlying assets that your company can select to fund. Businesses can generally finance four kinds of commercial assets: accounts receivable, inventory, machinery, and equipment.

What are the Advantages of Asset-based financing?

There are a number of benefits to using Asset-Based Loans over other financing tools.
 
The most relevant benefits are:
  • Improves cash flow by accelerating receivables cycle
  • Offers funds by margining marketable business or personal assets
  • Easier to get than traditional loans and lines of credit
  • Increased versatility of use
  • Can adapt to a growing business
  • Fewer covenants
  • Able to be obtained quickly in contrast to traditional institutional loans

How do Asset-Based Loans function?

ABL lending is typically created to resemble credit lines or structured loans. Asset-Based facilities that are backed by receivables and inventory are often structured to look like a revolving credit line. The client can get financing as billings are created or stock is received.
 
The customer gets their funds by sending a borrowing document to the loan provider. Funds are normally transferred to the borrower’s bank account after a day or two. Transactions are settled as soon as invoices are paid, or inventory is sold.
 
Loan Facilities that are supported by machinery usually resemble conventional term-based lending. The client gets a fixed quantity of proceeds at the start of financing. The borrowings are paid back through an amortization remittance schedule over an amount of time. Companies with multiple asset types can get flexible facilities that integrate both fixed-term loans and line of credit facilities.
 

Business Asset assessments are essential.

Asset evaluation is a crucial component of ABL funding line. For accounts receivable financing (or AR Factoring), billings are typically financed at a portion of gross face value; however, they must be payable by quality and creditworthy companies. Normally, the borrowing company gets 70 to 80% in advance and gets the rest (after fees) once billings are paid.
 

Inventory and machinery are typically funded at a portion of a liquidation recovery assessment. The amount loaned for inventory and equipment ranges from forty to sixty percent. Liquidation recovery value can frequently be substantially less than market value in a lot of situations.

Is Asset-Based Financing Right for My Business?

There are a number of factors to consider whether taking on an ABL facility makes sense for your business:

  • Do you have reliable, adequate cash flow to service the cost and repayment of an asset-based loan?
  • Will the assets you would like to get financing against hold sufficient value for the life of your loan?
  • Should you seek financing for all your business assets, or just specific ones that are better suited for ABL financing?
  • Are the business assets you would like to finance otherwise encumbered? (ie. is there a lien on them or are they already being financed?

There are of course other factors to consider in any asset-based financing discussion. The main aspect to remain mindful of is whether or not the cost of receiving cash to finance your business will help accelerate growth and, ultimately, profitability. It can be counterproductive to apply for ABL financing without considering the impact such financing would have on your overall business operations and profitability. Thus, finding the right financing partner, and balance between cost, impact on your operations and cash flow are critical to making a decision to seek ABL funding.

Asset-Based Financing Resources:

Before making an application for ABL financing, doing your homework will prove to be a good use of time in making a very important decision about how you choose to fund your business. Below are some resources to help you make your decision:

BDC – Asset-Based Lending

Entrepreneur Magazine – The Ins and Outs of Asset-Based Loans

 

More Posts

Accounts receivable factoring

Accounts Receivable (A/R) Factoring Accounts Receivable Factoring is a form of Asset-Based Financing that helps a company gain access to capital through advances against their customer invoices. A/R Factoring Companies can provide high advances and competitive rates. They can deal with most markets/industries and can work diligently to set up your access to funds rapidly.

Preparing for Business Loans

Preparing for Business Loans While the application procedure for getting a commercial loan is rather straightforward, there are a number of steps to take ahead of completing your loan application. In order to increase the odds that a loan provider accepts your request for financial assistance, consider doing the following. Research Several Loan Providers There


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