Have you taken advantage of asset-based lending (ABL) to provide an infusion of capital into your business? This article will share what ABL is and how you can use it to advance your company.
What Is ABL?
As the name suggests, ABL allows you to borrow money based on the value of a company’s assets. If you lack cash or credit to secure a loan, you may get funding through ABL. The collateral can include equipment, raw materials, accounts receivable, patents, fixed assets, and inventory to secure the loan. A lender provides a loan up to the equity in the assets.
What Are the Advantages and Disadvantages of ABL?
A firm may turn to ABL if it does not have strong credit. With enough security, a business can qualify for a loan that it may not have otherwise. If your company falls on hard times, ABL could be the best way to get the necessary financing.
Since asset-based loans are offered to businesses with weaker credit, the lenders will typically charge higher interest rates and fees than traditional loans. Because of the higher cost, ABL is usually not the first option for a business with an excellent credit rating. It also takes some time to get approved for ABL because the lender must audit your items to determine how much of a loan you qualify for.
What Is Invoice Factoring?
Another form of ABL is invoice factoring. In this case, the asset is the accounts receivable. A borrower can sell their accounts receivable to another company (called a factor). The factor gets the majority of the outstanding balance as a first payment and then collects the receivables until the debt is paid. Once the borrower’s debts are repaid, including all charges and fees, the borrower can receive the balance due on the receivables.
What Are the Advantages and Disadvantages of Invoice Factoring?
Factoring is good for quick financing. It is often approved in a few days, and you don’t have to put your valuable equipment or inventory at risk.
At the same time, factoring is considered a riskier form of lending. Because of this, factoring is usually more expensive than other forms of ABL, having higher rates and interest. You also sacrifice some privacy because the factor contacts your customers to confirm their accounts with you. Hence, your clients will know you are financing with invoice factoring.
Asset-based lending is a good option for small businesses that need short-term financing. Consider all your options, and decide if ABL could be right for you.