Asset-based loans (ABL) are used by small and middle-market businesses to improve liquidity and finance new projects. They offer similar advantages to conventional solutions. However, they are more flexible and have simpler qualification requirements.
This article discusses the eight important benefits of asset-based loans. To learn more about asset-based loans, read “What is Asset-Based Lending?“
1. Improved liquidity
The most important benefit that your company gets from asset-based financing is improved liquidity. An asset-based loan can provide financial stability and predictable cash flow to your company. This financial platform can help stabilize operations for companies with tight cash flows.
2. Supports mixed collateral and structures
ABL facilities are flexible and enable you to leverage different assets. These include Accounts Receivables (A/R), inventory, machinery, and equipment.
The facility is designed to match your assets. It can be structured as revolving lines and/or term loans.
Transactions secured by Accounts Receivable and inventory are structured as revolving lines. Transactions that have machinery and/or equipment also include a term loan component.
3. Simpler qualification
Asset-based loans have simpler qualification requirements than most bank loans and lines of credit. Additionally, they can usually be deployed faster than bank financing solutions.
The scope of the underwriting process varies based on the transaction complexity and type of collateral. The easiest asset to leverage is A/R. Inventory. Lines that include tangible assets like machinery and equipment require appraisals and further evaluation.
Asset-based loans are best suited for small and growing middle-market companies. The company must have an established track record and financial controls.
4. Available to distressed companies
ABLs can be used by distressed companies that cannot qualify for bank financing. They are commonly used by businesses undergoing a turnaround and companies assigned to Special Assets.
5. Stepping stone to other products
When managed correctly, an asset-based loan can be used as a stepping stone to bank financing. This enables your company to move to a lower-cost financing solution once it develops a track record of stability and compliance.
6. Fewer covenants
Asset-based loans have fewer covenants than conventional lines of credit. Furthermore, the line’s existing covenants are flexible. The line can help you handle seasonal fluctuations, ramp-ups, or turnaround situations. Ultimately, managing the line and staying in compliance is simpler.
7. Flexible borrowing capacity
Asset-based loans offer great flexibility when financing Accounts Receivable. The line limits are designed to be flexible and can increase to match growing sales. Line increases typically require minimal underwriting and can be deployed quickly.
8. Lower costs than alternatives
Asset-based lines have lower costs than other asset-based solutions, such as factoring and ledgered lines. This enables companies that have outgrown their current lines or are stable to move to an ABL and lower their financing costs.
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