Asset Based Lending
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What is asset based lending?
Asset based lending, also known as ABL is a type of financing that allows businesses to leverage the assets held in the company to secure funding.
The assets used can be either hard assets, such as machinery, equipment, vehicles or property, or softer assets such as accounts receivable or intellectual property value.
ABL can provide businesses with the funding needed to manage cash flow, purchase inventory, raise working capital or to fund business expansion.
What are the benefits of asset based lending?
Asset based financing allows business owners to leverage company assets to borrow money. The main benefits are:
- It allows you to borrow more money than would be possible using unsecured business finance.
- It may be easier to get your application approved due to the security offered.
- As ABL is made up of more than one type of finance, products can be stacked to suit your individual business needs.
- Additional funds can be raised at any time to meet working capital requirements.
- Leveraging assets to improve your working capital allows you to retain control of your business and is a good alternative to selling equity in the company.
What are the drawbacks?
As with any financial product, there are drawbacks to consider when taking out ABL. They are:
- For businesses with few assets, the amount of finance available using this finance product may be too low to truly benefit the business.
- Your credit history could be impacted should you fail to keep up repayments on your finance.
- In extreme cases, your assets could even be at risk of repossession.
Is it a good fit for my business?
If your business has strong assets, whether that is in your sales ledger, plant & machinery or other assets, ABL could be a good fit for you.
When a business finds its cash flow tight and could benefit from an increase in working capital, borrowing funds using ABL could help.
Types of finance available against business assets
There are different types of finance available to support a company’s finances using their assets to leverage borrowing.
The key products to consider are:
- Asset finance – Asset finance is the closest natural fit and allows a business to borrow against physical assets such as vehicles, plant and machinery or agricultural equipment. Asset finance can be structured as more of a loan, or a leasing arrangement. This funding type can be broken down into different product types such as operating lease, finance lease or hire purchase.
- Invoice finance – Invoice finance allows a business to borrow against the funds held in their sales ledger through unpaid invoices. Invoice finance is a flexible way to borrow that can fund the ebbs and flows in cash flow over a prolonged period of time. This can be broken down further into invoice factoring and invoice discounting.
- Trade finance – Trade finance, also known as international trade finance allows borrowing against international trade, either import or export.
- Secured business loans – A secured business loan can be used to leverage the equity in either a business owned property, or a residential property. This allows you to borrow using a loan for business purposes.
What are the alternatives to asset based lending for UK businesses?
The alternatives to asset-based lending for UK businesses are:
- Revolving credit – A business revolving credit facility allows you to borrow on a flexible basis, drawing down and repaying as and when funds are needed.
- Merchant cash advance – Merchant cash advances can be used to raise finance against future card receipts.
- Unsecured business loans – Unsecured business loans act much like a personal loan does for individuals. They allow a company to borrow a lump sum and repay it through fixed monthly repayments over a fixed term.
Will my business be eligible for asset-based lending?
Yes, if you own a business that has assets, there is a good chance that you’ll be eligible for ABL.
As ABL uses assets as security for your finance, the lending criteria tends to be less strict than unsecured borrowing.
Most established businesses with strong assets will have a good chance of being eligible for asset-based financing. This is due to the fact that the market is made up of a number of different products, which can be mixed and matched to suit a businesses needs.
If your business has little trading history, then hard assets such as machinery and equipment will be more favourable than softer assets such as inventory.
The key factors in whether a business is eligible for ABL in the UK are credit history, trading performance, the type of assets, cash flow and the required loan term.
Do you have assets of value on your balance sheet?
If you do, there is a great chance that you’ll qualify.
If not, there may be other options that could suit you better, such as an unsecured business loan or a revolving credit facility.
Do you want to borrow more than the value of your assets?
If you want to borrow more than the value of your assets, you may need to combine ABL with another finance source, such as an unsecured business loan.
Does your business have up to date financial statements?
Up to date financial statements are required when looking to borrow money for a UK company.
If your accounts have not recently been filed, then management figures will usually be required to offer the lender a more up to date picture.
