Asset based loans, also known as ABL, is a type of loan given by an ABL Facility to give a business a flexible approach to financing their current operations and necessities attributed for its future growth. Compared to traditional bank lending, where the borrowing company’s operations are evaluated and its future cash flow is projected, asset-based loans are based on the collateral put up for the loan. ABL is based on the business’s accounts receivables. In this situation, the lender advances funds for the borrowing business based on the value of the receivables the borrowing firm submitted to its lender.
An asset based loan from an ABL Facility, will typically take the form of a revolving line of credit, which is refreshed when the collateral – the receivables, are paid down. While these asset-based lenders also let borrowing business transact with them against other types of assets, including inventory, capital equipment, and real estate, receivables are frequently the largest proportion of collateral for these loans, quite bigger because of its greater liquidity.
Asset-based lenders focus on the quality of the collateral rather than on the borrower’s cash flow or credit rating. They evaluate the creditor’s ability to make payment and their track record of past payments to determine their credit-worthiness. Traditional bank lenders are constrained by internal bank lending standards.
Firm Borrowers benefit from asset-based loans in a multitude of ways. ABLs provide prompt and continuous cash flow liquidity for a company’s working capital, including the funds to purchase materials and construction supplies, to meet payroll and other operating expenses and to keep their accounts payable current.
A bank’s lending process may take some time and is cumbersome—counting several months in some cases. This is because the bank analyzes and verifies the borrower’s financial statements, his credit history, and the entire business. On the other hand, asset-based lending requires comparatively less time to commence and complete the transaction.
ABL loans are based on collateral, lenders are more often willing to be much more flexible and lend finances to a borrower firm during a period of financial crisis when the company’s finances are stretched.
Since asset-based loans do not depend on the borrower’ firm’s operating performance, rather on the quality of the collateral, fewer financial covenants are required of the borrower, and as compared with traditional bank lending. ABL lenders typically require a much more limited degree of reporting back to the lender.
Maria Catalina del Prado is a professional real estate transaction coordinator and loans processor. Her expertise centres on short-term financial assistance. She loves to write about loans that can help businesses improve their monetary flow.