Asset-based Lending for Small and Medium-sized Businesses

Asset-based Lending, or ABL, is a traditional type of financing where a business can leverage their existing assets as collateral to unlock capital or finance the purchase of new assets. Collateral that can be used ranges from equipment or inventory to real estate or intellectual property. In an economy where traditional bank lending for small and mid-sized businesses (SMBs) is slowing, private asset-based lenders are stepping up to the plate and allowing businesses to leverage collateral in exchange for capital at bank-like rates and terms.

How it works

When underwriting an ABL financing facility, a lender will focus on the value of the asset in question. Depending on the asset, a lender will conduct an examination, or an appraisal, in person or digitally to determine the value of the asset. The amount of financing that is approved based on the asset’s appraised value is through a loan-to-value ratio, which can be anywhere from 50-90% of the asset’s appraised value. Terms can range anywhere from 12-60 months and can be structured as a traditional term loan or a revolving credit facility, where the business has the ability to draw and use funds on an as-needed basis.

Benefits

Asset-based lending facilities can be free from covenants and in some cases, personal guarantees, which add flexibility for businesses. It also allows for seasonal companies with unpredictable cash flows to access timely capital during a busy or offseason. Additionally, as mentioned before, rates can be bank-like and are a more affordable alternative than unsecured funding. Businesses may also use asset-based financing to purchase new equipment or inventory at an agreeable rate that they may not want to allocate existing up-front cash for.

Disadvantages

Speed-to-access is the primary disadvantage for businesses seeking asset-based lending solutions. Whether going through a bank or private lender, underwriting needs to carefully assess the value of the collateral and the terms structured around it. Another downside is the possibility of default. If a business goes into default, the lender can seize the collateral. Finally, lenders will require regular monitoring and reporting on the value and status of the collateral.

Bottom Line

Asset-based lending is becoming an increasingly common financing solution for businesses who want to either use existing business assets as collateral for capital or purchase new business assets, such as inventory or equipment. The product comes at a cheaper cost than unsecured funding but has unique disadvantages that should be considered as well.