Things Every Business Owner Should Know About Asset-Based Lending

As a small business owner, you have to wear a lot of different hats throughout your business operations. Not only do you have to be an effective leader and manager, but you probably also need to play the role of an accountant and a salesperson. One of the areas where your business benefits the more you know is financing. Discover how asset-based lending can empower your company.

What Are Asset-Based Loans?

An asset-based loan is a financing option that requires collateral for approval. This type of loan gives you capital related to a percentage of the value of your collateral. This percentage is called the loan-to-value ratio, or LTV. Asset-based financing generally provides LTVs that range from 60%-90%, depending on the amount of risk connected to the loan.

What Is Collateral?

If this is your first time applying for ABL financing, you may not have worked with collateral before. The purpose of collateral is to give the lender a guarantee that you plan on making regular payments.

Many business assets can serve this function, including heavy machinery, a piece of real estate, commercial vehicles, or product inventory. The important thing is that the item must be valuable, easy to sell, and in good condition.

Why Do Businesses Use ABL Financing?

There are many potential reasons for getting an asset-based loan. You may want to expand your business and purchase equipment, new software, or modern technology. ABL financing is similar to working capital in that you can use the funds however you want. You can put the money toward hiring new employees, improving your business, expanding your office, or covering emergency repairs.

Some companies use asset-based lending to increase their profits. In this type of situation, you would use the item you want to purchase as collateral for itself. For example, real estate businesses often use ABL financing to buy low-value properties, remodel them, and resell them for a fast profit. This provides significant revenue, and the funds serve to pay off the loan and generate profit for other projects.

What Are the Pros and Cons?

On one hand, ABL financing is fast and simple. Even companies with poor credit can often qualify as long as the collateral is valuable enough. The downside is that asset-based loans have short repayment terms. They only work for transactions where you plan to make a large amount of money in a short time, such as inventory or real estate sales.