Asset-Based Lending

Businesses often find themselves in need of capital to fuel growth, expand operations, or navigate through challenging times. One avenue that has gained prominence in recent years is asset-based lending (ABL). Asset-based lending provides companies with a flexible financing solution by leveraging their existing assets as collateral. But what exactly is asset-based lending, and how does it work?

What Is Asset-Based Lending, and How Is It Different From Asset Finance?

Asset-based lending is a form of commercial financing where a business secures a loan using its existing assets as collateral. Unlike traditional loans that rely heavily on creditworthiness, asset-based lending focuses on the value of a company's assets, such as accounts receivable, inventory, equipment, or real estate. These assets serve as security for the loan, reducing the lender's risk and providing borrowers access to capital they may not obtain through other means.

A similar finance solution which is commonly confused with asset-based lending is asset finance. Although they both involve using assets as a part of the financing process, they serve different purposes and are structured in unique ways. The primary goal of asset finance is to acquire new assets without making a substantial upfront capital expenditure. It helps businesses grow by enabling them to use essential equipment immediately while spreading the cost over time. This differs from ABL, which obtains a loan using existing assets as collateral to provide working capital for day-to-day operations, cash flow management and business expansion.

Revolving Credit Facilities in Asset-Based Lending

Revolving credit facilities are a common feature in ABL, providing businesses with flexible access to funds. Unlike traditional term loans, which offer a lump sum that must be repaid over a fixed period, revolving credit facilities allow companies to borrow, repay, and re-borrow funds as needed, up to a pre-approved limit.

How Does the Asset-Based Lending Process Work?

The process of asset-based lending often involves the following steps;

Assessment of Assets

Firstly, the lender will examine the value and quality of the borrower’s assets to determine the loan amount they are willing to extend. This assessment may include appraisals, audits and due diligence to ensure that the assets are viable collateral. The ease of asset-to-cash converting - known as liquidity - plays a key role in securing a higher-funded loan with lower interest rates.

Loan Structure

Once the assets are appraised, the lender structures the loan, based on a percentage of the collateral's value, known as a loan-to-value ratio, or LTV for short. This is calculated by dividing the loan amount by the value of the asset(s) involved.

Monitoring and Reporting

Throughout the loan term, the lender closely monitors the borrower's assets to mitigate risk. Borrowers are often required to provide regular reports on their financial performance and asset value. This transparency helps both parties track the health of the business and ensure compliance with the loan agreement.

Repayment

Borrowers repay the loan according to the terms in the lending agreement. Repayment can take various forms, including periodic interest payments, capital repayments, or a combination of both. If the borrower defaults on payments, the assets used are seized and sold to generate funds to pay for the loan.

What Assets Are Eligible for Asset-Based Lending?

There are various types of assets which are eligible for ABL, ranging from physical to intangible. Lenders typically favour collateral that can be quickly liquidated as opposed to physical assets which are perceived as being riskier, due to their nature of being more challenging to convert into cash.

Examples of assets that can be used include;

• Business property
• Machinery
• Equipment
• Debtors
• Stock
• Intellectual property (IP)
• Accounts receivable (AR)

Factors Affecting Eligibility and Advance Rates

1. Asset Quality - Higher quality and more liquid assets attract higher advance rates.
2. Marketability - Assets that can be easily sold or converted to cash are preferred.
3. Condition - Assets in good condition are more likely to be accepted and valued higher.
4. Valuation - Accurate and reliable appraisals are crucial to determine the asset's value.

The Advantages of Asset-Based Lending

ABL brings the borrower several benefits, such as the following;

• Provides quick access to capital
• Flexible and scalable as the business grows
• Less dependent on creditworthiness compared to traditional loans
• The terms for repayment can be fixed, so better planning can occur
• Other forms of finance can be used alongside ABL

The Disadvantages of Asset-Based Lending

Like all other forms of borrowing, there are potential risks involved for the borrower, including;

• In the event of repayment failure, the assets used may be seized
• Asset valuations may fluctuate, affecting the borrowing capacity and loan terms
• This type of lending may come with higher interest rates compared to traditional options.

Get in Touch to Discuss Our Asset-Based Lending Options

At Union Business Finance, we’re committed to providing a range of bespoke finance options, tailored to your business needs. Get in touch with us today to discuss how we can help your business access the funds it requires.