Summary: Asset-based loans are commonly used by small and middle-market companies that need financing. Their main advantage is that they offer a flexible structure and support several types of collateral. Asset-based loans are popular with companies because they have fewer covenants and simpler qualification requirements than bank financing. Read “What is an asset-based loan? How does it work?” to learn more about this solution.
This article provides an overview of the general requirements to qualify for a business asset based loan (ABL). However, keep in mind that these requirements can vary based on transaction complexity.
1. Minimum company size
Asset-based loans are best suited for lower and middle-market companies. The lines have minimums and require that you invoice at least one million dollars monthly. They can also support companies with seasonal revenues, provided their yearly revenues meet the financing criteria.
Companies that invoice less than one million dollars per month should consider an alternate solution. Alternatives to an ABL include ledgered lines and invoice factoring.
2. Executive summary
A short executive summary describing the company’s situation, challenges, and objectives. A few paragraphs with this information will help the team get a more accurate picture of your company.
3. Eligible Accounts Receivable
Most asset-based lenders require that you finance your Accounts Receivable (A/R). Lines allow you to finance other assets, provided you also finance your A/R. Lenders include your receivables because A/R is considered a safe form of collateral.
Your company must have eligible A/R, and your invoices must be:
- Payable by creditworthy companies
- Due in less than 90 days
- Free of encumbrances
- Due from US/Canadian companies
- Foreign A/R is acceptable if credit-insured
4. Other assets
Companies have the option to finance other assets as part of a comprehensive ABL solution. These assets must meet asset-specific qualification criteria.
a) Inventory
Companies can finance their existing inventory as long as it is marketable. Inventory must be in good shape and well-maintained. Note that it is unlikely that highly customized or niche inventory will be eligible for financing.
b) Machinery and equipment
Companies can finance their existing machinery and equipment as long as they are operational, well-maintained, and marketable. Machinery and equipment that do not meet this criteria will not qualify for financing.
5. Financial statements
The company must have an accurate accounting system that is updated regularly. It must also have reliable financial controls in place. Financial controls are essential for line maintenance and use. Most lenders ask for two years’ worth of:
- Interim profit and loss statements
- Interim balance sheet
- Interim Accounts Payable report
- Interim Accounts Receivable report
- Two years’ worth of previous reports
- A/R aging report
If your company is also leveraging its inventory, you must also provide a detailed inventory report. This should include cost, items, and turn.
Note: Reviewed financial reports are preferable. All interim reports must be as of the same date. A/R and A/P reports should be both for summary and detailed information.
6. Financial controls
Asset-based loans typically use borrowing certificates to determine how much a company can draw from its line at any given time. Borrowing certificates are generated by the client using their accounting system. Consequently, the company must have well-managed financial controls to ensure that collateral reports stay current.
a) Invoicing and collections
Invoicing and collections are essential functions for the business and critical to the operation of an ABL. Invoices must be issued promptly and accurately. Your company must have a collections process to ensure invoices are tracked, paid on time, and updated in the accounting system.
b) Perpetual inventory system
Companies that want to finance their inventory must have a perpetual inventory system in place. The system must be reconciled regularly to ensure accuracy.
7. Tax returns
Companies must be able to provide two to three years’ worth of past tax returns. Tax returns are not needed to begin the application process. However, they are required once the transaction moves underwriting.
8. List of debts
Companies with open financing lines should also include a list of all debts, including the amount outstanding. In most cases, this debt will need to be taken out by the new asset based loan.
9. Collateral appraisals
Many asset-based lenders evaluate your company’s collateral and processes using external appraisers. The appraisal results must support the information in your systems and your financing request.
Note that appraisals are performed in the underwriting phase of the transaction. that the number of appraisers and types of appraisal depends on the collateral and the company.
10. Distressed / Special assets requirements
Asset-based loans are available to distressed companies and companies referred to their lenders Special Assets department. They will often involve negotiations with lenders and turnaround specialists. Consequently, the requirements for these companies vary and depend on the specific situation and transaction stage.
Need asset based financing?
Commercial Capital LLC is a leading provider of asset based financing. For more information, get an instant quote or call us toll-free at (877) 300 3258.