Asset-Based Lending

Beacon Business Capital offers Asset-Based Lending to companies that need to maximize their borrowing capacity by using both accounts receivable and inventory as collateral. Unlike traditional bank loans that use complex credit scoring processes, balance sheet ratios and cash flow projections, Asset-Based Lending (ABL) uses business assets as the main driver when establishing a borrowing base. This lending approach allows a company to achieve far greater borrowing power than the traditional cash flow approach applied by banks.

ABL vs Bank Financing

Banks follow a conservative and cautionary approach that prefers assets that are secure and remain in place. Assets like accounts receivable and inventory that are intangible or turn over are recognized as part of a borrowing base but afforded lesser advance rates. An ABL Lender is able to offer much higher advance rates as their valuation of both accounts receivable and inventory is far greater than a bank.

Asset-Based Lending Benefits

Asset-Based Lending works very well for manufacturers, distributors and service companies whose balance sheets are leveraged due to seasonal need or erratic industry cycles that interrupt cash flow. The majority of our ABL clients are undercapitalized companies that have well performing accounts receivable (reliably paid in 90 days or less) that are growing faster than their cash flow intake. To qualify for an ABL loan, annual sales volumes should be close to a million dollars or greater.

Asset-Based Lines of Credit are widely recognized as a premiere loan product beyond the bank. These types of loans provide businesses a solid and stable financial support system that makes cash flow readily available to fulfill operating capital needs. A borrower’s credit line is determined by the value of assets like business equipment, machinery, accounts receivable and inventory and some recurring contract revenue. Personal assets may be required.

The fees that borrowers pay are based on the amount taken from the borrowing base. Companies typically seek and qualify for advance amounts between $500,000 and $25 million dollars to be used for operating expenses. Other reasons ABL loans are facilitated may be for restructuring or turnarounds, mergers and acquisitions or the cost of company buyouts.

How It Works

As part of due diligence, the lender evaluates the borrower’s assets to determine the line of credit. Common advance rates from the credit line for accounts receivable is 80% – 90% and 50% or more on the value of inventory. Borrowers are free to use these funds for a multitude of uses.

After the borrower is approved, the actual credit line amount is established by the lender. An agreement is entered into by both parties where a repayment schedule is determined. The borrower may then receive weekly, biweekly or monthly advances from the line as needed and repays the cash according to the repayment terms. Prompt payments ensure the borrower’s ability to have the line increased over time as needed.

The lender will require invoice payments to be deposited into an account under their control and supervision which is called a “blocked” account. Excess funds are transferred daily from this account to an operating account of the borrower for immediate usage. Each lender sets the parameters by which the borrower can draw against the line of credit. A common advance rate of 85% may be set to draw advances against the accounts receivable and 70% on net orderly liquidating value (NOLV) of company inventory. The borrower’s financial performance and assets are monitored daily by the lender. Interest rates are significantly lower in asset based lending as compared with unsecured loans given the lender may take possession of the collateral should the borrower default on the repayment schedule.

Collateralizing the Asset Based Lending Product

ABL loans include accounts receivable, inventory, business equipment and factory machinery. Recognized inventory may be marketable raw material and finished goods. Accounts receivable is the primary collateral recognized by lenders in asset based lending followed by inventory. Inventory may be hard to value and lacks the valuation stability that accounts receivable maintain. Manufacturing machinery and business equipment are more favorable than inventory because the actual duration of their value is longer lasting and easier to assess.

ABL best serves business to business companies

Small to mid-size companies that are in the manufacturing, wholesale and retail distribution and sales companies are usually the industry sectors that acquire Asset- Based Lending given it is an expedient cash advance transaction that allows for a more flexible repayment schedule than does a term loan. Companies utilizing ABL platforms typically will have annual profits of $1 Million to $500 Million or above. Loan approvals are based upon basic business data including tax returns, company financial statements, accounts receivable, accounts payable aging reports and equipment lists.

Asset based financing is often the best available avenue for young and growing companies. ABL loans are granted based on collateral rather than a complex credit scoring process and heavy financial scrutiny applied by banks. And ABL loans can be put together relatively quickly by an ABL lender as opposed to banks that can take weeks or months during the underwriting and approval stage. The reasonable rate of interest, expedited funding, revolving credit convenience and forgiving approval process make ABL a highly favorable option for small and medium-sized companies during turbulent financial periods.

Are you ready to discuss an Asset-Based Loan for your business? Call Beacon Business Capital at 713-828-9085 and share your needs with us. We’ll quickly determine if Asset Based Lending is right for your business.