Asset based business lending (ABL) is a types of commercial financing in which funds are provided after they are secured with assets on a company’s balance sheet. Such asset based loan collateral may be accounts receivable, commercial real estate, equipment or other business assets. Asset based lending usually comes in two types of facilities: term loans and lines of credit, but are also available in other forms like factoring, merchant cash advances and ACH financing. Factoring, cash advances and ACH and MCA financing aren’t true loans but are, instead, the sale of future earnings for an upfront cash payment. There are a number of asset based lenders with different collateral criteria and leverage. While some asset based lenders like to lend against a company’s accounts receivables, other lenders like to fund using a ratio of a hard assets worth (commercial real estate, personal real estate, land, equipment and machinery) or even against a firm’s inventory. Asset based business loans are especially useful for company’s that may have credit scores too low for traditional bank financing, don’t have sufficient cash-flow for bank-rate loans, or already have a traditional or SBA loan in-place. Asset based business financing is used as a 2nd position loan, or even used to consolidate other higher-interest business debt.
The main advantage of asset based business financing is the ability to monetize a company’s balance sheet to obtain financing that otherwise wouldn’t be available. But, because asset based lenders don’t necessarily require the best cash-flow and credit requirements to approve and fund, they take a higher risk than traditional lenders. Even though the ABL lender has secured the loan with the company’s assets, the process of selling off the asset can lead to losses for the funding company. Disadvantages associated asset based lending generally are the fact that they are more expensive than traditional financing (because of increased risk) loss of control of assets, and covenants associated with the asset based facility and higher fees (due to title searches, appraisals, and collateral monitoring fees.