Asset-based loans, or ABLs, are a form of financing that is secured by the assets of a business. Most of the time, these loans work like a line of credit. This means a business can borrow from the assets on a revolving basis to cover expenses as needed.

Who Uses Asset-Based Loans?

Typically, asset-based lending is used by businesses that need working capital for operations or growth. Most of the time, a business that requests an ABL has cash flow issues. In most cases, these issues are due to rapid growth. The asset-based lender helps the business manage the issues that stem from rapid growth and sets them up to grow.

Who Qualifies for Asset-Based Loans?

Asset-based loans are typically available for small- to mid-sized companies that are stable and have assets. The assets that are used must be available. That is, they must not be used as collateral in another loan. If they are, the other lender must be willing to subordinate their position. In addition, there must not be any significant tax, legal, or accounting issues that could hamper the assets.

What Can be Used as Collateral?

The primary collateral for asset-based lending is accounts receivable. However, other collateral, such as assets, inventory, and equipment may be considered.

What is the Borrowing Base & How is it Determined?

The “borrowing base” is how much the lender is lending you. It is calculated as a percentage of the value of the collateral. Typically, a business can borrow 75 to 85% of the value of their accounts receivable. If inventory or equipment is used, the borrowing base is usually 50% or less.

An asset-based lender will evaluate your assets and ledgers regularly to clarify and update the borrowing base. Since accounts receivable totals fluctuate, so does the borrowing base.

How Does Due Diligence Work?

Before an asset-based lender extends a loan offer, they must complete the process of due diligence. This is where the value of your collateral will be calculated, examines your accounting book, and determines if there are any burdens on said collateral. They will usually do an on-site visit and speak with employees. The lender will most likely charge a fee for this site visit, which varies based on the lender.

What Does an ABL Cost?

The cost of your asset-based loan depends on the size of the loan, type of collateral, and risk involved.  Most of the time, they utilize an APR- but charges for additional services are also common. The average APR for asset-based lending ranges from 7-17%.

How Does Asset-Based Lending Differ from Factoring?

Often, asset-based lending is confused with factoring. Primarily because accounts receivable is used as the primary collateral in both. While the benefits offered are very similar, these are very different funding vehicles.

In factoring, the business is not borrowing money, but selling their receivables to improve cash flow. Rather than being financed in bulk, they are sold individually. Also, the factoring company is part of the collections process. This means that the finance company can work with smaller, often troubled, businesses that would not qualify for asset-based lending.

Do You Need Asset-Based Lending?

Are you interested in asset-based lending for your business? Do you feel like you would benefit from this type of funding? If this is the case for you, contact Sterling Capital Consulting today. We can guide you through the process of obtaining the funding that you need for your business.