Asset-based loans (ABLs) are a type of financing that enables companies to get funding based on their assets. They are popular among small and midsize businesses because they offer simpler qualification and compliance requirements.
While asset-based loans are more expensive than conventional bank financing, they are cheaper than most other solutions. This article discusses the costs of the lines and explains how they are priced. Read “What is an asset-based loan? How does it work?” to learn more.
1. Due diligence fee
Lenders typically charge prospective clients a due diligence fee for underwriting q transaction. This fee helps defray the lender’s due diligence costs.
There is no set due diligence cost, as it depends on the size and complexity of the transaction. The fee typically covers the cost of:
- Comprehensive financial reviews
- Asset examinations
- Legal assessments
The due diligence fee can be high for complex transactions. These usually require third-party professionals (e.g., appraisers) to perform several tasks. Keep in mind that travel may be required, especially when examining inventory, machinery, and similar assets.
2. ABL Rates
Asset-based loan rates are typically priced by adding two separate rates. These rates are commonly referred to as the ‘base rate’ and the ‘uplift.’ The ABL rate is typically noted as a “Base rate + X%,” where X% represents the ‘uplift.’
The base rate is indexed to a published rate. Most asset-based lending facilities use the Secured Overnight Financing Rate (SOFR) as their base rate, though this varies by lender.
The ‘uplift’ is an incremental rate added to the base rate. It can go from 5% – 11% and reflects the risk profile of the transaction.
Note that asset-based loans with mixed collateral usually have multiple lines. Each asset is assigned a separate line with its own terms.
a) Accounts receivable
Lines secured by accounts receivable and inventory are offered as revolving lines. The lines typically have a maintenance cost and a utilization cost.
i. Maintenance cost
The maintenance cost covers the cost of managing the line. It’s a few thousand dollars per month, with larger lines having higher maintenance costs.
ii. Utilization cost
The utilization cost is based on SOFT + X% and applied to the average monthly balance. The final ‘uplift’ rate (e.g., X%) considers your company’s size, asset quality, and general transaction risk.
The following table gives you an idea of rates for different transaction sizes. It assumes a SOFR of 4.5%.
| Line Size | Uplift (X%) | SOFR | Total Rate |
|---|---|---|---|
| $750,000 | 9% | 4.5% | 13.5% |
| $2,000,000 | 7% | 4.5% | 11.5% |
| $10,000,000 | 5% | 4.5% | 9.5% |
(Note: Table is scrollable left/right on mobile devices. Touch table if scrollbar does not appear)
iii. Example
The most common way of calculating the utilization cost is by determining a daily rate and multiplying it by the number of days in the month. The resulting rate is multiplied by the average monthly balance, which gives the utilization cost.
For example, assume an annual rate of 12%, a 30-day month, and an average monthly balance of $100,000. You can calculate the cost as follows: (12% / 360 days) * 30 days * $100,000, which equals $1,000.
b) Machinery / Equipment
Lines secured by machinery and equipment are offered as conventional term loans. The term typically lasts 36 months and has a balloon payment at the end.
The ‘uplift’ for these loans goes from 7% – 11%. The following table provides an idea of costs for different transaction sizes. It assumes a SOFR of 4.5%.
| Line Size | Uplift (X%) | SOFR | Total Rate |
|---|---|---|---|
| $750,000 | 11% | 4.5% | 15.5% |
| $2,000,000 | 13.5% | 4.5% | 13.5% |
| $10,000,000 | 11.5% | 4.5% | 11.5% |
(Note: Table is scrollable left/right on mobile devices. Touch table if scrollbar does not appear)
c) Real estate
Lines secured by real estate are structured as term loans. They typically have a 180-month term with a balloon at the end.
The ‘uplift’ for these lines goes from 6% – 10%. The following table provides an idea of costs for different transaction sizes. It assumes a SOFR of 4.5%.
| Line Size | Uplift (X%) | SOFR | Total Rate |
|---|---|---|---|
| $750,000 | 10% | 4.5% | 14.5% |
| $2,000,000 | 8% | 4.5% | 12.5% |
| $10,000,000 | 6% | 4.5% | 10.5 |
(Note: Table is scrollable left/right on mobile devices. Touch table if scrollbar does not appear)
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.
Disclaimer: All rates are provided for illustration purposes only. ABL rates can vary substantially based on the economic environment and transaction details.