ASSET BASED LENDING
An Asset Based Loan (ABL) is a type of corporate financing secured by corporate assets. Most asset based loans are structured to function as revolving lines of credit. This structuring allows a company to borrow from its assets on an ongoing basis to cover expenses or capital expenditures as needed.
Asset based loans are used by businesses that need working capital for operations or growth. Often, businesses that apply for a ABL have cash flow problems. However, many of these cash flow problems are due to rapid growth. The asset-based lending facility helps businesses overcome rapid growth problems and positions the business for growth.
Generally, asset-based financing is offered to small and medium-sized businesses that are stable and have assets that can be financed. The company's assets may not be pledged as collateral to another lender. If they are pledged to another lender, the other lender must agree to subordinate its position. In addition, the company must not have any serious accounting, legal or tax problems that could encumber the assets.
Most asset based loans have a minimum of $150,000 to $5,000,000 in utilization requirements.
The primary collateral for an asset based loan is usually accounts receivable. However, other collateral such as inventory, equipment, and other assets may be used.
The borrowing base is the amount of money the asset based lending company can lend you. The borrowing base is set as a percentage of the value of the collateral pledged. Generally, companies can borrow 75% - 85% of the value of their receivables. The cost of an Asset Based Loan is determined by the amount of the loan, the type of collateral and the overall risk. Most loans are priced with an APR (APR). However, fees for other services are also common.
The APR of a ABL ranges from 5% and 10%.
Asset-based lenders regularly review books and assets to determine and update the value of the borrowing base. Since receivables are often involved, the borrowing base fluctuates.