Interested in learning more about Asset Based Loans? Here’s everything you need to know

What Are Asset Based Loans?

Asset Based Loans, also known as commercial finance, are business loans that uses the company’s assets and collateral instead of standard monetary capital. It’s based on a revolving line of credit. This gives the company the option to continuously borrow from the lender when the funds are needed, catering for any expense incurred or for investment purpose.

Who Usually Applies for Asset Based Loans?

These loans used by companies that require working capital to keep all its business process running, for growth and expansion. Rapid growth can leave a company grappling for cash to maintain its operations. Asset Based Loans (ABL) offers a solution to this challenge. A company chooses to commit its assets as collateral for the cash infusion.

What are the qualifications for an ABL?

Stability and collateral. Any company, small or mid-sized, that wants to qualify for an ABL must prove their stability and have the collateral to back it up. These assets cannot serve as collateral on any other loan. The type and value of these assets usually determine the value of the loan as well as the individualized terms and conditions.

Lenders deny ABLs to companies that have serious accounting, legal or tax issues—especially if these issues can affect the position of these assets. Lenders prefer lending high amounts. Why? Maintenance costs of ABLs are the same regardless of the amount, with most ABLs averaging between $750,000 and $1,000,000.

What Assets are Used as Collateral?

An ABL can be secured by a wide range of assets, from inventory to equipment. However, the most common collateral is accounts receivable. Lenders prefer liquid assets as they are easily converted to cash in the case of a default.

How is the Borrowing Base Determined?

The amount of money that the lender lets a company borrow is known as the borrowing base. This base level of loan is determined based on the type of collateral and amount. The more liquid the collateral is, the higher the borrowing base is, with accounts receivable securing a company 75%-85% of the value of the asset. In contrast, inventory and equipment only secure a company a borrowing base of 50% or less.

The lender regularly inspects the value of the assets pledged as collateral. Assets, especially accounts receivable, are in constant fluctuation. Regular inspections keep the loans and assets reflecting their true value.

What is Due Diligence and How Does it Work?

Every lender carries out due diligence before they approve of any asset-based loan.

The lender inspects a company’s collateral, determining its value. This due diligence process ensures that there are no encumbrances or impediments on the collateral. In addition, the lend checks the accounting books to make sure they are in order and that everything is accounted for.

Lenders charge for these inspections and usually conduct them onsite so that they can get to speak to the relevant employees.

What is the Cost of Asset Based Loans?

The type of collateral pledged as security, the size of the ABL and general risks involved help determine the cost of an ABL. Annual percentage rate loan price ABLs, with the average rate for most ABLs ranging from 7%-17%. However, a borrower may however be charged for other services offered.

What’s the Difference Between ABL and Factoring?

Asset-based loans and factoring both provide similar benefits to a company: they are both cash infusion solutions. While they are quite similar, there are also fundamental differences that set them apart. Though both deals with accounts receivable, in factoring a company sells its accounts receivable to improve its cash flow. Oppositely, companies using ABLs borrows money. In factoring, the receivables are sold individually while in ABL they are financed in bulk.

Is Factoring or an ABL Right for My Business?

The decision to choose factoring or an ABL is completely dependent on the company’s needs, type of collateral it has and the general risk of the transaction to the company. While bigger firms prefer ABLs due to their lower maintenance cost, smaller companies usually prefer factoring, as these solutions are easier to obtain and also have low diligence costs.

In Need of an Asset Based Loan?

Blue Ridge Factors is a market leader in the provision of asset-based financing. Contact Us Online or call us today at 800-530-2621 for more information.