What is Asset Based Lending

What Is Asset Based Lending?

It is true that Asset Based Lending is secured financing for commercial borrowers whereby the lender takes a lien on the assets it finances.  However, ABL is much more than just a secured loan.  It is financing that is primarily based on the value of the customers’ collateral as opposed to financing that is primarily based on the firm and it’s financial strength or weakness.  A traditional credit approach is to assess a company’s creditworthiness by analyzing historical cash flow and balance sheet strength as the primary source of repayment.  An Asset Based Lender will assess creditworthiness by the quality and performance of the company’s collateral with the collateral being the overriding source of repayment and the financial stats being secondary. 

The collateral that ABL lenders evaluate is primary a company’s working assets:  trade accounts receivable and inventory.  The ABL lender will structure a borrowing base formula to provide the customer with available funds to operate short term business needs by financing the gap between a company’s generation of sales and production of inventory until those assets convert to cash.  The ABL structure is ideal for companies experiencing growth in their business and/or seasonality in their business cycle.  It is also ideal for companies emerging from a difficult economic or industrial cycle and companies in an early stage with limited sources of equity.  It is also ideal for the entrepreneur who sees the value of leveraging business assets to fund growth and expansion as opposed to other options that would dilute his or her ownership interest.  Or, the entrepreneur that plans to acquire another company by leveraging it’s assets or selling the company to the management team under a similar debt structure.

How do Asset Based Lenders provide solutions to these various situations?  By close knit relationships with their customers with real time access to collateral and financial information that is critical in monitoring the borrowing base which in turn, enables the lender to provide daily to weekly funding solutions as a business ebbs and flows.  By closely managing the risk, ABL lenders provide more availability to their customers than traditional lender sources and make funding decisions more like a business partner.

The point to take away….Asset Based Lending is not just a secured loan, it is a multifaceted industry with the ability to provide flexible solutions to a company’s business cycles, growth and ownership strategy.  It can make the difference in a company’s success navigating competitive situations, growth opportunities, and economic fluctuations.