For many years, Asset Based Lending was reserved only for large multi-million dollar companies but now, ABL is now being made available to companies that are small to medium sized companies, which can make these companies more competitive with the big guys.
So, What is Asset Based Lending?
Let’s get a definition for the term to start:
Asset-based lending is any kind of lending secured by an asset. This means, if the loan is not repaid, the asset is taken. In this sense, a mortgage is an example of an asset-based loan. More commonly however, the phrase is used to describe lending to business and large corporations using assets not normally used in other loans. Typically, these loans are tied to inventory, accounts receivable, machinery and equipment. Asset-based lending in this more specific sense is possible only in certain countries whose legal systems allow borrowers to pledge such assets to lenders as collateral for loans. (Reference: Wikipedia)
ABL Lenders are more flexible and will look for assets which are most simply liquidated in order to create a borrowing base, and then use that borrowing base as collateral for the line of credit for the company. Many lenders will establish rules around the exposure limits for the line of credit which state what the “mix” of assets used for the collateral can be.
For example, companies that have a very high concentration of inventory, as compared to accounts receivables will have a limit placed on the amount of funds available to them on the inventory portion of the ABL credit line.
The reason for this is that inventory is more of a challenge to liquidate than accounts receivable, so in order to mitigate the risk, limits will be established.
The same rational is used for other assets which can be used as a borrowing base, such as equipment, fixtures, land, or other tangible assets.
Which Assets Cannot be used as a Borrowing Base?
Assets that cannot be used as a borrowing base, will vary from lender to lender but some companies will not allow foreign assets, such as international receivables or assets which are kept outside of the borrowing company’s country.
One of the great things about ABL facilities is that they are not “standard” or “cookie cutter” loans. They will often be structured for the company seeking financing based on what the company can offer as collateral. The credit line facility borrowing base will not necessarily be the same for other businesses, even in their same industry. This “à la carte” philosophy helps companies get the funding they need to grow their business and they will not need to fit the mold that many lenders, especially banks, will require that companies fit in, in order to give them a loan.
All that being said, not all ABL Lenders are the same either, some funders will allow more than others in terms of what assets are able to be used, and which are not. Some lenders will allow international receivables, others will not.
If you plan to check out this financing option for your business, make a short list of the assets your company has available to provide as credit, this way when you are speaking with the person at the ABL company, you will be able to determine quickly if they will be a fit for your company.