Asset-Based Loan (ABL)

Asset-based lending deals with the loaning of money that is secured by collateral. In the case of asset-based loans, the collateral is a business’s assets. This includes their accounts receivable, inventory, equipment, and/or other properties. An asset-based loan may be issued as a loan or a line of credit by a financing but using your assets as collateral does not necessarily mean you are selling or giving them away. Essentially, if a business fails to make payments to the funder, the funder can seize the collateralized assets.  

How Asset-Based Loans Work 

It is common for a business to need working capital to meet cash flow demands, cover payroll expenses, prepare for unexpected expenses, and more. An asset-based loan or line of credit is easier for businesses to be approved for in comparison to a traditional bank loan. Alternative lenders will normally advance a certain amount of funds to a business, in exchange for a percentage of their secured assets. This percentage is generally 70 to 80 percent of account receivables and around 50 percent of inventory. However, if a business can show enough cash flow or cash assets, the lender may approve the loan with a lower percentage. To qualify, asset-based lenders typically look at financial statements, reporting systems, sold inventory, and customers with a solid track record of repayment.  

Rates and Terms for Asset-Based Loans 

Terms and interest rates for this loan depend on the lender and the business’s credit history, cash flow, and amount of time they have been in business. Fortunately, credit history is not a huge factor since your loans will be backed by collateral. In most cases, rates range from 7 percent to 30 percent. For the terms of an asset-based loan, it also varies. Typically, if a business uses their accounts receivable as collateral the terms are shorter. On the other hand, it is typical for businesses to land on longer terms if they only pledge their equipment or machinery.  

What Assets Can Be Used for Asset-Based Lending? 

For this loan, a business may use their accounts receivable, inventory, equipment/machinery, real estate, and more. For accounts receivable, the more invoices a business has, the more a business may qualify to borrow. When dealing with inventory as an asset, it is typically a good option for wholesale or retail businesses. A lender will appraise the value of a business’s inventory to use it to secure a loan. Likewise, with real estate, it must be appraised to qualify as collateral. If a business decides to use their equipment or machinery as collateral, it can only be used if the equipment is owned by the business, not by the business owner.  

Advantages and Disadvantages of Asset-Based Loans