An asset-based loan (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 expenditures or investments as necessary.
An ABL Facility is often approached by companies that require working capital to operate or achieve progress. Often, companies that request an ABL experience cash flow issues. However, many of these cash flow problems are rooted from rapid growth. The asset based lending facility helps companies manage and eradicate the possibilities of the rapid growth issues and positions the company for progression.
Generally, an ABL Facility offers to assist small mom-and-pop corporations to mid-sized companies that are stable and have assets that can be financed. In order to be approved for an ABL loan, the company’s assets must not be pledged as collateral to another lender. If in case, they are pledged to another lender, the other lender must agree to subordinate its position. Also, the company must be free of any serious anomalies regarding accounting, legal, or tax issues which could encumber the assets.
Majority of asset based loans have a minimum of $750,000 to $1,000,000 in utilization requirements. 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 utilized.
The borrowing base is the amount of money that the asset based lending company lets businesses to 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 approximately 50% or less.
Asset based lenders inspect and verify ledgers and assets regularly to determine and update the value of the borrowing base. Since it often involves accounts receivable, the borrowing base fluctuates.
Before offering a loan, the lender needs to complete its due diligence process. The lender calculates the value of the business collateral, oversee any encumbrances on the collateral, and inspect the accounting book. Onsite visits and speaking to relevant employees are some of the strategies lenders to do determine if it is good to collaborate with such business.
They often charge for the site visit and collateral evaluations, though costs vary. The cost of an asset based loan is determined by the size of the loan, the collateral dichotomy, and general risk. Most loans are priced using an annual percentage rate (APR).
Mark Reyes has been a property investment consultant for 15 years. He has helped several home owners and companies get out of potentially destructive debt by using different kinds of refinancing options.