Traditionally, lenders primarily assessed the business’ cash flow to determine their credit worth. This form of financing was quite limiting, especially for new businesses with a limited cash flow. Sometimes, businesses require loans to run their operations as they await pending payments or to inject funds for investments, and that is where asset-based lending comes in.
Asset-based lending is a credit solution where your business can use the value of its assets as security to get a loan. You can offer your market securities, equipment, property, and inventory, among other assets and property the business owns. You’ll even get lower interest rates because of the security offered by the assets compared to unsecured loans. Here’s everything you need to know about asset-based lending (ABL), including how it works and its benefits.Â
How does asset-based lending work?
Every day, businesses turn to NASDAQ to guide them to the best candidates for ABL. The central focus of an asset-based loan is the asset or collection of assets being offered as collateral. The asset can be the company’s merchandise, real estate, property owned, and outstanding bills. Once you pledge an asset as collateral, the lender will make you borrow an offer for credit or a loan equal to a predetermined portion of the value of the asset.
The value of an ABL is primarily founded on a loan-to-value ratio that the company decides on. Lenders offer higher ratios for the more liquid assets. Generally:
Loan-to-value ratio = Loan amount ÷ Asset value
Benefits Of ABL
There are many reasons why businesses turn to ABL for loans. Here are a few benefits:
Easy To Acquire
The loans are easy to acquire. Since the vital prerequisite for these loans is owning an asset, you can place it as collateral, and it’s a lot easier to qualify. Other options are focused on projected earnings and a business’ history, which can be very limiting.
Flexible Lending Options
ABL is generally a more flexible lending option as it has fewer limitations to how the money is utilized, provided it’s spent on commercial purposes. The amount you can borrow also increases as the value of assets in your firm rises, making it a lucrative option for more and more companies.
Ability To Leverage Fixed Assets
ABL is an avenue for businesses to utilize their assets effectively. Companies with fixed assets on their balance sheets can leverage them as collateral to get some extra working capital. Investing in business equipment and inventory serves a bigger purpose by providing the company with an option to leverage them for loans at competitive rates to resolve any possible difficulties in cash flow.
Asset-based Financing Solutions
Asset-based loans are a common source of financing for many businesses today. Provided your business has met all the qualifications needed to get the loan, you can request it, have it approved, and receive the funds in the shortest time possible. Interests are lower and offer financial stability during financial crunches when cashflow hardships occur.
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