Asset-based lending (ABL) allows you to capitalize on your company’s assets, such as accounts receivable, machinery, and inventory. It provides your company with funding that can be used to improve operations or take on new projects.
Asset-based lines are an effective financing tool for small and midsize companies. They have simpler qualification criteria, fewer covenants than conventional financing, and can be deployed faster.
Commercial Capital is a leading provider of asset-based financing solutions in Canada. We have over 20 years of experience financing small companies.
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How does asset-based financing work?
An asset-based line can operate as a revolving line, a term loan, or a combination of both. The configuration depends on the assets that are being leveraged.
Most ABLs operate with a borrowing certificate. The borrowing certificate determines what percentage of the assets can be leveraged. The three most common asset types for corporate asset-based loans are accounts receivable, inventory, and machinery.
Read “What is an Asset-Based Loan?” to learn more.
1) Accounts receivable
The accounts receivable-backed component of an ABL operates like a revolving line of financing. The line allows you to draw funds up to a limit determined by the borrowing certificate. The line is paid back as the receivables that back it are paid.
2) Inventory
The inventory component of the ABL operates like a revolving line based on the value of the inventory. Inventory can be leveraged based on a percentage of its appraised value.
Most financing firms use the Net Orderly Liquidation Value (NOLV) to appraise inventory, but this varies. In some cases, the NOLV may be substantially lower than what you paid for the inventory.
3) Machinery
Asset-based loans secured by machinery operate like term loans. Your company can borrow up to a specific percentage of the machinery’s appraised value. The line is repaid over a period of time, like a conventional term line.
Clear benefits
Asset-based financing solutions have several advantages over other solutions of comparable size. The most common advantages include:
- Improved liquidity
- Asset flexibility
- Flexibility of use
- Quick deployment
- Simpler qualification
- Fewer covenants than loans
- Lower costs than other alternatives
- Stepping stone to other products
Qualification criteria
Asset-based financing is easier to obtain than comparable solutions. To qualify, your company should meet these criteria:
- Must have a minimum of $1,000,000 A/R
- Accounts receivable from creditworthy commercial clients
- Additional quality assets, if needed
- Effective internal controls and collections
- Reasonable financial statements
- Must be up to date in taxes or have a workout plan in place
- Must be profitable. Alternatively, it must have a turnaround plan.
Uses
Asset-based loans have few restrictions and can be used for any tactical or strategic business purpose, such as:
- Improving working capital
- Fulfiling large orders
- Expanding businesses
- Purchasing corporate assets
- Financing turnarounds
- Acquiring businesses
Industries
We can work with companies that offer products and services to other businesses or government entities. Industries include: