Asset-based lending or ABL is a type of commercial financing where funds are provided after being secured by assets from a company’s balance sheet. These types of loans can be secured with commercial real estate, equipment, accounts receivable or other tangible business assets. Asset-based lending normally comes in two forms; lines of credit and term loans, but can be available in other forms such as merchant cash advances, ACH financing, and factoring. Cash advances, ACH financing, and factoring are not true loans, but instead are basically the sale of a business’s future earnings for cash up front. There are a lot of asset-based lenders that have different collateral requirements and leverage. Some of those lenders prefer to lend against accounts receivables, while others like to fund using a blend of tangible assets such as real estate, equipment or inventory. Asset-based financing is especially useful when 1) a business needs financing but have a credit score that is too low for traditional bank financing or 2) don’t have a sufficient cash flow for bank-rate types of loans or 3) already have an SBA or traditional loan already in place. Asset-based financing is a second position loan and can be used to consolidate other higher interest business credit.
The biggest advantage of asset-based financing is that a company can leverage their balance sheet to get financing that they otherwise would not qualify for. This is because asset-based lenders don’t demand the best cash-flow and/or credit score in order to approve and fund the loan. Asset-based lenders also take a higher risk than banks or traditional lenders. This holds true even though the loan is secured because it can be an expensive process for the lender to liquidate assets in the event of a default. Because of this increased risk, asset-based loans are typically more expensive than traditional financing. Higher costs are also associated with increased fees due to appraisals, collateral monitoring fees, and title searches.