ABL or an asset-based loan is the kind of financing for your business that you can secure using company assets. These loans are structured to work as lines of credit that are revolving. This allows a company to get funding through assets to cover investments and expenses as needed.
Who is it for?
Such loans are used by companies that require working capital for smooth functioning and growth. Companies applying for ABL usually have cash flow problems that arise as an effect of rapid growth. Asset-based lending helps companies in managing the growth better and counters growth issues.
Who qualifies for it?
Generally, such a form of financing is for the small and mid-scale companies which are on a stable base and have assets worth financing. However, financing the asset of the company must not be pledged as collateral to some other lender. If this is the case, then the lender will have to agree on subordinating its position. Importantly, the company cannot be having any record of serious accounting, tax issues, or legal issues that may obstruct the assets.
Significant collateral for an ABL is usually accounted for as receivable. Other collateral like inventory, equipment, and other assets can be used as well.
Borrowing Base: It is the amount of money allocated by the asset-based lending company for you to borrow. The base is determined as a percentage of the value of the pledged collateral. Companies are allowed to borrow up to 75-85% of the total value. And for inventory and equipment, the borrowing base is 50% or less. The lenders inspect the assets and ledgers from time to time to determine the value of the borrowing base and update accordingly. As it involves accounts receivable, the borrowing base thus fluctuates.
How does due diligence work?
Before you are granted the loan, the lender completes the due diligence process wherein the lender calculates the total value of your collateral and determines if there are any obstructions on the collateral. Following this, the accounting book is inspected.
Lenders tend to pay an onsite visit and often speak to some of the employees. They also tend to charge for the visit and for the collateral evaluation, the cost of which varies.
How much does it cost?
The size of the loan, collateral, and general risk determines the cost of an asset based loan. The loans are mostly priced through an annual percentage rate(APR). The APR ranges from 7-17%.
Factoring and ABL: Asset-based loan often gets confused with factoring. Both of these products give similar benefits. However, the confusion is created from the fact that accounts receivable is the main collateral for both products.
Which is better?
Between factoring and an ABL, the better product is the one that suits the size of your company, type of collateral, and the general risk of the transaction. However, ABL is a common preference of larger companies due to its flexibility and lower cost. And smaller companies prefer factoring as the due diligence costs are lower there and are easier to obtain as well.