Finance

What is an Asset-Based Line of Credit?

What is an Asset-Based Line of Credit? 1Architect and customer businessman shaking hands top view, desktop with building project, tools and wood swatches on background
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As the name suggests, asset based line of credit, also known as Asset Based Lending (ABL) centres on placing your assets, including accounts receivables, inventory, and equipment as collateral for your loan.

Who Needs Asset Based Lending (ABL)?

Companies typically apply for asset-based lending when they need working capital to ensure the smooth running of their daily operations. The company uses its own assets to obtain the required financial assistance using the asset as collateral. While a majority of the company uses accounts receivable as their collateral, an organisation can also use machinery, real-estate, inventory, etc. as security.

The loan term is based on the type of asset you have pledged. Typically, lenders prefer liquid assets such as mutual funds, stocks, bonds, treasury bills, exchange traded funds, etc. As highly liquid assets are easy to cash, they tend to carry high loan-to-value ratios, be more flexible repayment terms, and have lower interest rates. ABLs are never equal to the estimated value of the pledged asset. Certain margin is held in order to recover the liquidation costs.

Benefits of Acquiring Asset Based Lending:

Following are some prominent benefits of ABLs for businesses –

  1. Easy to Acquire

Contrary to conventional loans that have complex eligibility criteria, ABLs are quite easy to acquire. If your company meets the lending criteria, then you can acquire the loan in no time.

  1. Provides Financial Stability

If your company is going through difficult times financially, such loans can offer the financial stability that you have been looking for. This is typical because the loans are given within a short time period in order to increase the cash flow.

  1. Better Flexibility

Asset-based lending comes with a higher degree of flexibility with regards to the money spending. It doesn’t contain any long list of restrictions as to where and how you can use the money.

  1. Less Debt

If you want to acquire money without raising any debt, then ABL is the ideal option for you.

 Drawbacks of Asset-Based Lending

 Following are certain drawbacks associated with ABL:

  • Risk of Losing Asset

If you are unable to re-pay the loan amount, you could end up losing your pledged assets. Furthermore, when you place your assets as collateral for ABL, you give the ownership to the lender. Once you have repaid the loan, then only you can take back the ownership.

  • Low Valuation Risks

The amount of loan in ABL depends on the overall collateral value of the asset you have pledged. If the value of your assets rises, your loan limits will not go up. So you will have to collateralise for a lower amount. In the case of asset-based lending, the lender holds the upper hand due to the security placed.

  • Over-Mortgaging

 Continuously placing your assets in order to obtain finance comes with the risk of over-mortgaging. There are chances you will end up owing more on your lending than you possess in equity.

How to Apply for An Asset-Based Line of Credit?

If you have evaluated all your options and are ready to choose ABL as your finance option, then it is time for you to understand the process of applying.

Contrary to conventional lending options, the application process associated with ABL can take more time. The process entails the involvement of both parties, filing a lot of paperwork, go through interviews, and undergoing auditing process in order to ensure the company’s liquidity.

While it is time-consuming, it can be worth all the effort. If you are patient and don’t need cash on an immediate basis, then ABL is the best way to finance your business. Following are some prominent steps that you have to follow while applying for an asset-based line of credit.

  1. Organise your Business Finance

Before you begin to apply for ABL, you have to ascertain the financial standing of your business. Along with the value of your business assets, lenders will also evaluate your overall financial standing. They might request to assess all the financial documents such as balance sheets, profit and loss statements, sales forecast, business tax returns, banking statements, etc. You can take assistance from your accountant in order to streamline this process.

  1. Determine Your Company’s Asset

When it comes to ABL, the value of your asset is paramount. Therefore you have to identify the company’s assets and their value to the vendor. Collect documents like accounts receivables statements, inventory list, machinery and equipment list, etc. in order to gauge the value of your assets.

  1. Ensure that Your Assets are Clear

Post receiving the application, the lender will perform a Uniform Commercial Code-1 search on your organisation. This is done to determine whether there is any general asset lien against your business property. They ensure that no other borrower has rights to your property. If you hold any outstanding debts, then it is the right time to clear it all. Perform your own search before to see if there is debt that might impact your loan process.

  1. Fill out the Application and Submit Along with Documents

Once you have done all the analysis from your part, now you have to fill the ABL application and submit along with required documents. Ensure to read the loan requirements carefully and adhere to all of them precisely. Some lenders require you to have your business audited by a third-party agency. So check with your lender regarding the same. Once you submit the application, you will have to wait for a couple of weeks to get a response. Once your application has been reviewed, the lender will contact you and commence the necessary process.

When you are reviewing your financial records and assets of the company, you will be able to understand whether this is the right move for you. If you have a great personal score, strong experience, and credit score, then the conventional business loan would serve you better. However, if you are a growing business that has easily liquidated asset, then you can acquire ABL and accelerate the growth process of your business without any hassle.

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