Many companies that find themselves in possession of strong balance sheet of assets, ranging from equipment and inventory to accounts receivable, find they are able to obtain favorable financing by pledging assets as collateral for the funds offered by the lender. In most cases the asset-based financing solution provides greater flexibility for the company in more liquid funds, allowing for growth or to meet ongoing cash outlay needs.
What is Asset Based Lending?
Basically an Asset Based Lending arrangement uses the items of value that the company owns, from real estate to accounts receivable and from equipment to inventory, to secure a loan. The ABL is typically established as revolving line of credit, without the typically structured repayment plan common with traditional bank financing, and is interest-only.
What are the Uses of Asset Based Lending?
Among the various uses of ABL arrangements, companies that are experiencing substantial growth find that the cash flow allows them to meet the increase in financing needs that accompanies such a period in a company’s lifecycle. Another key time where this type of financing can be useful is in mergers & acquisitions, when for strategic reasons a company may need to purchase a partner or competitor company. Other uses include working capital funds that a company needs to thrive, and capital expenditures, such as substantial investments in equipment or buildings that require substantial cash from a company.
What are the Benefits of Asset Based Lending?
In most cases, ABL is more versatile and efficient than other forms of bank financing, so that a company can meet on-going cash flow needs for seasonal fluctuation demands or materials and supplies, for instance. Properly used, such alternative financing allows for lower interest expense by paying down amounts and borrowing new funds, so you pay interest only on the new financing, and allows for greater liquidity for companies with strong asset portfolios. In many instances lenders find simpler reporting requirements, fewer covenants, and greater lender tolerance with fluctuations in business cycles, as the assets of your company are securing the funds.
What is the Difference Between Asset Based Lending and Traditional Bank Financing?
Traditional bank financing tends to be more heavily reliant on establishing to the lender a business plan with sufficient cash flow to satisfy the formula used by the lender, whereas Asset Based Lending tends to be more flexible and offer greater liquidity because of its use of a company’s assets as collateral for the funds. The lender in ABL takes a first priority position in the value of the assets that are being financed, securing the borrower’s repayment promises with the goods and equipment or inventory of the company.
See more benefits of Asset Based Lending with Prime.