Asset-based business lending (ABL) is a form of commercial financing where funds are provided after being secured with assets on a company’s balance sheet. These assets may include accounts receivable, commercial real estate, equipment, or other business assets. Asset-based lending typically encompasses two types of facilities: term loans and lines of credit, but can also include factoring, merchant cash advances, and ACH financing. Although factoring, cash advances, and ACH and MCA financing are not traditional loans, they involve the sale of future earnings for an upfront cash payment. Various asset-based lenders have different collateral criteria and leverage preferences. Some may prefer to lend against a company’s accounts receivables, while others may focus on hard assets such as commercial real estate, equipment, machinery, or inventory.
Asset-based business loans are particularly beneficial for companies with low credit scores, insufficient cash flow for bank-rate loans, or existing traditional or SBA loans. They can be used as a second-position loan or to consolidate other higher-interest business debt.
The primary advantage of asset-based business financing is the ability to leverage a company’s balance sheet to obtain financing that may not otherwise be available. However, because asset-based lenders do not always require the best cash flow and credit requirements, they undertake higher risk than traditional lenders. While the ABL lender secures the loan with the company’s assets, the process of selling off the asset can lead to losses for the funding company.
Disadvantages associated with asset-based lending generally include higher costs compared to traditional financing, loss of control over assets, adherence to covenants associated with the asset-based facility, and higher fees for title searches, appraisals, and collateral monitoring.
