Asset-Based Lending
What is asset based lending?
Asset-based lending (ABL) is a great way for SMEs and professions alike to use their assets to secure finance. For example, loans can be secured based on equipment, inventory or accounts your business has, meaning that cash flow is not disrupted.
A business finance solution, asset-based lending employs a company-owned asset as security against a loan. To assess if a firm is eligible to receive finance, lenders evaluate company assets like inventory, equipment, property and accounts receivable. The loaned amount lenders are willing to offer a business that qualifies is directly connected to the value of assets offered as collateral, along with other factors.
This lending option differs from many other finance products like unsecured loans, where a lender puts greater emphasis on a firm’s working capital, profitability and balance sheet. When companies require support for periods of inconsistent cash flow and to cope with unpredictable market shifts, asset-based lending presents an alternative type of financing.
How does asset-based lending work?
A wide range of lenders provide asset-based financing, and it’s offered in the form of lines of credit or as a loan. In asset-based lending, the loan offered to a business receives is founded on the value and type of collateral provided.
A common metric employed by lenders, the loan-to-value ratio (LTV), is usually used to calculate the total amount a company can qualify for. LTV is worked out by dividing the loaned amount by the asset used as security’s worth.
For example, if a company offers its inventory up as collateral, a lender might potentially provide a loan that doesn’t exceed 50 per cent of the value of the inventory.
In simple terms, the ease at which an asset can be converted into a cash sum (in case the company defaults on the loan) plays an important part in securing lower interest rates and higher funding on a business loan. Consequently, lenders often prefer collateral like securities or a certificate of deposit that can be swiftly liquidated.
Physical assets like property and expensive industrial equipment are often perceived as a riskier prospect because of the challenges involved in their conversion to cash.
What assets can be used for asset based lending?
Businesses can use an extensive range of assets as security when applying for asset-based finance. These include stock, equipment, property, machinery and debtors. Some lenders will also consider intangible assets like patents and other intellectual property (IP).
At AJL Finance, we can support you with:
- Acquisitions
- Refinancing
- Growth
- Turnarounds
- Management buy-ins
- Management buy-out
A specialist in SME business loans, at AJL Finance, we are here to help. Our terms are flexible, and you could borrow between £1,000,000 to £15,000,000. For more information on asset-based lending get in touch with us today.
What are the benefits of asset-based lending?
Firms looking for SME business loans find asset-based lending is advantageous for several reasons.
For instance, it can help companies gain swift access to the working capital they require by leveraging assets such as inventory, equipment and receivables resulting in improved cash flow. Asset-based lending also offers enhanced flexibility, as it lets funds to be deployed for operations or growth without strict rules on usage. This gives businesses greater control on how they use the funding they secure. Finally, when enterprises have high-price assets, it allows them to borrow on a bigger scale. Larger loan amounts become accessible, which can make asset-based lending a valuable option for businesses with erratic cashflow and poorer credit histories.
Who qualifies for asset-based lending?
Enterprises that can prove they have significant verifiable assets such as accounts receivable, high-value equipment or inventory are all eligible to apply for asset-based lending. If you are unsure if your business would be considered for asset-based lending, you can complete our simple-to-use eligibility checker and find out. You will find it at the bottom of every page here on our site.
What do I need to consider before using asset-based lending?
Before you apply for asset-based lending, there are some important points to consider. First, you must ensure that your firm has significant and eligible assets that you can use as security. These can include equipment, inventory and receivables. However, you should also consider your capability of repaying the loan if your application is successful and all the costs involved. This may include higher rates of interest and various fees. You should also be aware of any administrative requirements that your selected lender specifies, like regular reporting.
Make sure that you fully understand that your business assets serve as collateral. As a result, if you are unable to make your loan repayment, you will lose ownership of your equipment and inventory; this may make it very difficult for your business to operate effectively.
It is essential that you select a financial product that suits the individual needs of your business. For further guidance, contact us today at AJL Finance.
