What is Asset-based Lending?
Everything you need to know
Asset-based Lending, or ABL for short, is a form of Alternative Finance in which a lender provides a loan using assets as security. Typically, ABL is used as a means to acquire a loan when the borrower does not have access to traditional forms of finance.
Because of the varied forms this type of lending can, and historically has, come in, many perceive the solution as risky or unreliable. While the financial industry can certainly be a playground for many unsavoury businesses and practices, customers with the right tools and education can safeguard themselves from deceptive practices and utilize this essential service. An important part of gaining an understanding of this service is to understand its history, so let’s start there.
The history of Asset-based Lending
During the Middle Ages, asset-based lending took the form of “merchant banking,” where wealthy merchants would lend money to traders, using their merchandise as collateral. This practice allowed traders to purchase goods without having to use their own funds.
In the early 20th century, asset-based lending became more formalized, with the creation of finance companies that specialized in providing loans secured by inventory, equipment, and other movable and immovable assets. These finance companies became more prevalent in the 1960s and 1970s, as businesses sought alternative sources of financing.
How does ABL work?
Asset-based Lending is a simple product. A lender leverages a business’ assets to provide the business with a loan, using the assets as security against the loan. At EBF, we typically provide customers with a loan at a percentage of the value of the asset – this is usually agreed to beforehand and is outlined in the loan agreement.
The primary benefit of Asset-based Lending is that your business retains possession and use of the asset which has been used as security. This means that your business remains yours, while still receiving the cash injection that it needs.
Other benefits include quick access to funds, access to large capital value, maintaining the integrity of shareholding, and lower interest rates than that of traditional finance. Another benefit of working with the right financer is that clients who are non-credit-worthy can rebuild their credit score using this means of finance.
How do you know if Asset-based Lending is right for your business?
Like all financial products, ABL services the specific needs of a business, and not all businesses will find Asset-based Lending to be the right fit for their business. So, how do you know Asset-based Lending is right for you? Here are a few ways you can identify whether Asset-based Lending would work for your business:
- Type of Business: Asset-based lending is typically best suited for businesses in industries such as manufacturing, distribution, construction, and retail, which have tangible assets that can be used as collateral.
- Cash Flow: Asset-based lending is designed to help businesses manage short-term cash flow needs, so if your business is experiencing cash flow problems, this type of financing may be a good option.
- Collateral: In asset-based lending, the lender will require collateral to secure the loan. If your business has valuable assets that can be used as collateral, asset-based lending may be a good fit.
- Credit Score: If your business has a poor credit history or little credit history, traditional lenders may be reluctant to provide financing. Asset-based lending may be a good option in this case, as the loan is secured by collateral, rather than based on creditworthiness.
- Cost: Asset-based lending may be more expensive than traditional financing, depending on the structure of your loan agreement, so it is important to compare the cost of the loan to the benefits it provides for your business. You should also ensure that you are working with the right lender to get the best value possible.
Overall, asset-based lending can be a good option for businesses that have valuable assets, need short-term financing, and have difficulty obtaining traditional financing. It is important to carefully consider the terms of the loan and the impact it will have on your business before deciding. If you need help making this decision, our Account Managers would love to chat with you! Click here to get in touch.