Asset Based Lending, or ABL, refers to business loan solutions secured by assets (in this case property) that are used as collateral. Most banking and non-banking finance institutions offer this service. Many financial institutions also call it commercial finance. Companies looking for extra capital to operate and grow often apply for ABL typically based on accounts receivable, inventory, equipment, land or property.
Small business funding options allow companies to cover financial gaps, as well as grow their business. Often unsecured funding options are considered to be higher risk to lenders, so the rates and terms presented are sometimes unfavorable to the borrower. However, with Asset Based Lending, rates and terms are often much more favorable, since businesses take funds against their properties/land. Because the loan is placed against the collateral, lenders feel more comfortable giving longer terms and lower rates to the borrower. Below REIL brings a comprehensive guide to asset-based loans, explaining the ins and outs of it.
Does Your Business Qualify for Asset Based Lending?
A lot of small businesses and even startups can get asset-based funding without a great financial history or credit score. Companies often hit their low in sales when cash flow dips resulting in poor credit. Since these companies don’t have any other financing options left, an asset-based loan turns out as a great choice for them.
To qualify for asset-based loans, you just need to satisfy the following conditions.
- 500+ Credit Score: While other funding options require a high credit rating, businesses with a score of over 500 can apply for asset-based lending. In the case you own large or valuable property, finance companies can still consider you eligible for asset-based fundings.
- $100,000 in annual revenue: Any business with over $100,000 in annual business revenue is eligible for ABL
- 12+ months in business (recommended): Business should be at least a year old to qualify for the best ABL rates. Despite this, businesses with less than a year in business can still apply for Asset Based Lending if their credit and their revenue meet the minimum requirements above.
What Documents Do You Need to Apply?
ABL’s minimum documentation requirement also makes it very useful to new businesses or businesses without proper financials. These loans require the business owner to own at least a portion of their assets for approval. From there, the lenders determine what percentage of the property’s value the company is allowed to borrow. The documents you need to submit for a quick approval of an asset-based loan include:
- 3 Months of Business Bank Statements stating the business revenue
- Collateralized Asset Sheet
- Completed REIL Capital Application
What Are the Benefits of Asset Based Lending?
Lenders are less concerned about cash flow, revenue, time in business, and credit rating, instead primarily focusing on the property to be used as collateral – this and a number of other benefits make it an ideal funding option for small businesses with the financial crisis.
Minimal Documentation
Unlike traditional small business loans, asset-based loans can be obtained quickly. It does not require a lot of documents, nor does it need a strong credit history as compared to other financing options.
Financial Stability
Hard economic times can hurt businesses to the core. An Asset Based Loan can restore the financial stability of a business by quickly providing working capital without heavy documentation or qualifications. It can restore cash flow and also increase the business’ revenue profile within a short time span.
Easy from Start to Finish
To get an Asset Based Loan, you don’t have to go through several processes since it requires minimal documentation and is based on your property or land. For this reason it is easier for financial companies to approve funds equivalent to some percentage of the asset value. Some financial companies also consider the businesses’ current position in the market towards eligibility of ABL.
Flexibility
Simply put, ABL is the most flexible loan when it comes to utilizing the funds. Unlike other loans that come with a lot of forms where you have to mention the use of capital and how you plan to spend it, ABL gives you the flexibility of spending however you want with no strings attached.
Variety of Collateral Types for Asset-Based Loans
A number of banking and non-banking financing institutes offer asset-based loans on almost all types of assets including equipment, receivables, inventory, and property.Â
Some lenders specialize in one type of asset, such as equipment, and do not offer other loans since they don’t have the expertise and experience in property-based loans. Other financing companies specialize in real estate options, and offer asset-based funds for all kinds of properties such as commercial lands, industrial lands, single-family residential lands, multi-family residential lands, and so on. These loans require a thorough knowledge of real estate properties, and as such have the resources to evaluate and price deals based on the real estate property value.
Asset Based Loan Value and Interest Rates
The asset value is critical to the funding amount of an Asset Based Loan. Based on the value, you can get a minimum of $50,000 to a maximum of $2,000,000 as working capital for your business leveraging asset-based loans. The creditworthiness of the applying company determines repayment terms, which may range anywhere from 6 months to 18 months. For mortgage refinances based solely on real estate, terms can extend out to upwards of 30 years.
For mortgage refinances, interest rates can run as low as 4%. For most other products, interest rates of asset-based lending start from 15%, which is considerably high as compared to other funding options. However, a business looking for working capital in an economic crisis can leverage ABL even on higher interest to get back on track. Furthermore, you can get the funds released within 2 weeks of applying.
Conclusion
Asset Based business finance can be a great option for businesses trying to get some extra working-capital that have property to leverage, especially if they have not-so-good credit scores and business revenue history. While companies can borrow a huge amount of funds based on property owned, it is not compulsory to only pick ABL. For smaller and quicker financial needs, you can also go for a line of credit or merchant cash advance for your business.