Asset-based lending is a powerful financial tool that small business owners can leverage to fuel their business growth. If you’re new to the concept, don’t fret. This comprehensive guide will demystify asset-based lending for you.
What is Asset-Based Lending?
Asset-based lending (ABL) is a form of business financing wherein a company leverages its assets as collateral to secure a loan. Assets here could include accounts receivables, inventory, machinery, or real estate. In case of loan default, the lender has the right to seize these assets to recover their investment.
Advantages of Asset-Based Lending
ABL has numerous benefits, which is why it’s popular among small businesses. It provides quick access to cash, often with less stringent credit requirements compared to traditional lending. It’s also flexible – the loan amount can increase with your assets’ value, making it a great option for businesses that are trying to position themselves for growth.
How to Qualify for Asset-Based Lending
The qualification criteria for ABL are typically less stringent than traditional loans. Lenders usually look at the worth of your collateral, not just your credit score. However, lenders will also scrutinize your business’s financial health, history, and market conditions.
The Process of Asset-Based Lending
The ABL process begins with an initial assessment of your business’s assets. Post this, you’ll receive a ‘borrowing base,’ which is the loan amount you’re eligible for. You may not receive the full value of your assets as the loan amount as lenders account for a ‘haircut’ – a safety margin to cover potential market fluctuations.
After the loan is granted, lenders may conduct periodic audits to ensure the value of your assets remains consistent.
Risks Associated with Asset-Based Lending
While ABL has its advantages, there are risks involved too. If your business defaults on the loan, you risk losing your assets. Also, ABL loans can carry higher interest rates than traditional loans, and there could be additional fees for audits and administration.
With this comprehensive guide, we hope you’re better equipped to evaluate if asset-based lending is the right choice for your business. Contact Select Capital today to learn more about our asset-based lending solutions.