Asset Based Financing

Asset-based financing is a way for rapidly growing, cash-strapped companies to meet their short-term cash needs. In general, companies can tap their assets to generate cash flow through asset-based loans or through factoring. ABL is ideal for manufacturers, wholesalers, distributors, importers, retailers and some service-oriented organizations, with tangible assets and qualified management.

The lending structure is based on a percentage of receivables plus a percentage of the estimated liquidation values of inventories or other collateral, such as machinery, equipment, real estate and intangibles. As your sales grow, so does your loan availability – giving you greater access to capital and the flexibility you need to run your business.

Asset-Based Loans
When you apply for an asset-based loan, you pledge assets to secure a loan from a bank or a commercial finance company. You still own your assets, but if you don't make good on your payments, the lending institution can seize them.

Asset-based loans are typically for companies with less-than-perfect credit. Interest rates and fees on these types of loans have fallen in recent years due to intense competition, but generally they are higher than traditional bank loans. As with all commercial lending, rates are negotiable. Lenders will look at your credit record, how long you've been in business and whether your assets are liquid.

Accounts receivable and inventory are common collateral, but any asset might qualify. When you use accounts receivable to secure a loan, you can expect to get about 75 percent of the face value of your fresh invoices. The loan-to-value ratio drops rapidly for older accounts. When you use inventory to secure loans, your lender will most likely use a bonded warehouse -- an approved warehouse used to store goods and monitor inventory -- and pass the cost on to you. Loan amounts vary widely from about 30 to 80 percent of the value of your inventory.

Advantages and Disadvantages
The main advantage of asset-based financing is that small companies can usually get more cash more quickly than they could from a traditional bank loan. Also, asset-based lenders offer an array of services including accounts receivable processing, collections and invoicing.
The drawback of asset-based loans is the expense; using your assets to generate cash flow increases your cost of funds and cuts into profits.