What Is Asset-Backed Lending?
Asset-backed lending (ABL) is a financing tool used to unlock underlying value from items such as inventory, receivables, trademarks and other assets. Asset-backed lending works similar to a bank loan but works to fund and refinance businesses by collateralizing the pledged assets of the borrower. It allows companies to gain access to their capital receivers by pledging the accounts receivable, inventory, and other assets for a loan.
Understanding the Basics of Asset-Backed Lending
Asset-backed lending, or ABL, is a type of financing that provides a borrower with access to working capital. The borrower is required to offer an asset, such as a company’s inventory, accounts receivable, or other tangible collateral, as security to the lender. Most often, ABL is an alternative to a bank loan and helps a business get a loan that can be used to purchase equipment, make payroll, and other working capital needs.
Benefits of Asset-Backed Lending
Asset-backed lending offers many benefits that traditional bank loans simply cannot provide. Some of the main benefits include:
Flexibility: Unlike traditional bank loans, ABL offers more flexibility in terms of interest rates, repayment schedules, and other features.
Quick Access to Funds: Access to working capital is much more immediate than with a traditional bank loan; it can often take weeks or months for a loan application to be approved with a bank.
Fewer Restrictions: Unlike traditional bank loans, ABL does not come with conditions such as personal assets held with the lender, or assets pledged as collateral.
Lower Interest Rates: Asset-backed lenders typically offer more competitive interest rates than traditional lenders, as there is less risk associated with ABL.
Types of Assets That Can Be Used For Asset-Backed Lending
Asset-backed lending can be used to fund businesses or help businesses gain additional working capital. The following assets can be used as collateral when obtaining an ABL loan:
Accounts Receivable: Accounts receivable are one of the most common assets used to secure ABL loans. Accounts receivable is the dollar amount owed to a company for goods or services that have been sold and delivered.
Inventory: Many companies use inventory as backing for an asset-backed loan. Inventory is a company’s tangible goods that are held or stored in order to be sold.
Real Estate: Real estate is also a common asset used to secure asset-backed loans. Real estate can include office buildings, warehouses, and other commercial or residential properties.
Intangible Assets: Intangible assets are assets that cannot be seen, felt, or touched. These can include rights, trademarks, copyrights, patents, and other assets of a company.
Equipment and Furniture: Equipment and furniture used by the business can also be used as collateral for asset-backed loans.
Advantages and Disadvantages of Asset-Backed Lending
Asset-backed lending is becoming increasingly popular with small businesses as a method of finance. It can provide borrowers with fast access to working capital without the hassle and cost of a traditional bank loan. However, there are also some potential disadvantages to consider.
Advantages of Asset-Backed Lending
Access to Faster Working Capital: Most borrowers who obtain an ABL loan have their funding within days or weeks. This is in contrast to bank loans, which can take weeks or months to complete.
Lower Fees: Traditional banks may require appraisal fees, legal fees, and other upfront costs in order to obtain a loan. Asset-backed lending requires minimal upfront fees and is therefore often more cost-effective for businesses.
Flexible Repayment Schedules: Borrowers can often customize the repayment schedule to meet their needs, as there is more flexibility in terms of repayment terms and interest rates.
Disadvantages of Asset-Backed Lending
Risk: For ABL lenders, there is always a risk of their collateral not performing as expected. This means that if the asset fails to perform, the lender may not receive full repayment for the amount loaned.
Limited Temporary Funding: Most businesses cannot use ABL for long-term funding. These types of loans are usually best suited to finance temporary or short-term working capital needs.
No Personal Guarantee: As ABL requires collateral to secure the loan, the lender will not have the assurance of a personal guarantee from the borrower.
How Businesses Can Secure an ABL Loan
Businesses can access asset-backed lending from banks, non-bank lenders, or other financial institutions. The steps to securing an ABL loan generally include:
Step 1: Evaluate Your Needs: Before applying for an ABL loan, business owners should assess their financing needs and determine how an ABL loan can help.
Step 2: Choose a Lender: Businesses should research different lenders to find a lending institution that meets their needs.
Step 3: Fill Out the Application: Once a lender is selected, the business must fill out an application, which typically requires general personal and business information and the types of assets to be used as collateral.
Step 4: Submit Financial Documentation: Most lenders will require some type of financial documents, such as tax returns, a balance sheet, income statement, and/or other financial statements.
Step 5: Negotiate Payoff Terms: The business should negotiate loan terms with the lender, such as repayment amounts and interest rates, as well as any other fees and conditions.
Step 6: Sign the Agreement: Once the terms have been negotiated, the business can sign the asset-backed loan agreement with the lender.
Asset-backed lending is a great option for small businesses looking for working capital to finance short-term needs. It can provide access to funds within days, offers lower interest rates and fees than traditional loans, and offers more flexibility in terms of repayment. However, businesses should be aware of the risks associated with ABL, as some lenders may reserve the right to take control of the pledged asset if the loan is not repaid on time.