Many new and small business owners are looking for financing, but are running into obstacles when trying to secure loans through banks and other traditional lending sources. Either the businesses do not have high enough credit scores, or they lack the financial history to establish themselves as “loan-worthy” in the eyes of banks. Sometimes a bank loan is out of the picture entirely, because small business owners would like to avoid taking on any additional debt. In these cases, business owners turn to asset based lending (ABL) as a viable means to get access to extra funding.
This is How is Asset Based Lending Determined
Traditional bank loans require collateral, impacting the business credit rating, and placing debt on the balance sheets in order to receive additional funding. Asset based lending acts as a revolving line of credit, and the amount of money available is derived from the value and quality of assets a business has, such as equipment, or the volume of receivables.
Advantages of Asset Based Lending
Asset based lending – as stated above – is not a traditional bank loan, and therefore brings no debt to the balance sheets. Additionally, businesses can draw from asset based lending as they need it, because ABL is a revolving line of credit, as opposed to one lump sum. The other advantage to ABL is that as a business grows, and the volume of receivables increases, so does the line of credit available.
Disadvantages of Asset Based Lending
When seeking asset based lending through traditional institutions, they may require businesses to make them their exclusive source of financing for everything from ABL to traditional loans, which can be restrictive. Also, because this form of financing is arranged quickly to sidestep the red tape of conventional loans, the rates may be higher than usual.
Using Asset Based Lending for the Long-Term
Many businesses utilize asset bales lending as a stopgap measure to alleviate strains on cash flow, or to stock up on inventory and supplies prior to an anticipated heavy sales period. However, because the line of credit grows with the volume of receivables, some businesses owners use ABL for the long run, in order to have access to an extra source of funding whenever they need it.
Asset based lending is a great source of capital without having to apply for traditional bank loans or take on extra debt. While most businesses only use ABL to overcome short-term challenges, some entrepreneurs see the value in having an extra line of credit that grows along with the business.