How to Qualify for Asset-Based Loans: Key Requirements
Qualifying for asset-based loans is relatively straightforward, since – as the name indicates – they are loans secured by business’ own assets.
Assets serving as collateral
In asset-based lending (ABL), the loan that a lender makes will use a business’ assets as collateral for the loan. This makes it a secured loan. The collateral is often in the form of accounts receivable, inventory, equipment or real estate. When evaluating an application for an asset-based loan, lenders will focus primarily on the value of the collateral.
In this sense, ABL is different from the conventional bank loan process. Banks typically evaluate prospective borrowers on the basis of cash flow, with focus on future performance. ABL, though, looks first at assets and then at cash flow. This allows businesses with inventory and receivables to focus on what they have now.
Type of asset
Lenders take into account the type and value of available assets. They value different types of assets differently. In general, the more liquid your assets, the more likely you are to receive a higher loan amount and a lower interest rate on the loan.
Lenders generally look to assets that turn into cash fastest, such as inventory and receivables. For example, a company may be able to get a loan for up to 90% of the value of its accounts receivables, 80% of the value of its equipment and 50% of the value of its inventory. Using ABL, many businesses can obtain loans for a higher dollar amount than they could with a traditional cash-flow loan from a bank. For a business that needs cash to fuel growth, ABL can be a smart move.
Credit
Credit, as well as underwriting, standards are more flexible with asset-based loans than with traditional bank loans. Because an asset-based loan is a secured loan, the lender can take possession of the asset if you fail to keep up with your loan payments. As a result, asset-based loans are generally considered less risky by lenders, and come with less-stringent qualifying standards than similar loans that don't have collateral attached.
This is good news for businesses with strong assets, but unstable or fluctuating cash flow. Even companies with less-than-stellar credit history may still be able to access needed financing. That said, it is always best to maintain a positive credit and financial history.
Lender relationship
Ultimately, ABL eligibility requirements will vary by lender. Working with a lender experienced in ABL and in your industry, and who knows your business, can make a big difference in the ability to qualify for an asset-based loan.
A good asset-based lender will serve more as a business partner than one just executing a short-term transaction. An ABL partner will take the time to understand your business model, with its risks, strengths and weaknesses. They’ll evaluate the real value in each asset class and maximize the amount they can loan to each asset group.
A real-life example illustrates the importance of selecting and working with a true ABL partner. An auto parts distributor needed to bridge a cash flow gap, brought on by chip shortages, an unexpected drop in accounts receivable and supply chain issues that impacted lead time to secure products. Instead of inventory receipt in 45-65 days, they were looking at 90-150 days, which meant cash-flow shortages.
Understanding the company’s unique business model, its ABL financing partner could expediently review transactions and field exams, and confidently extend a temporary increase to its line of credit along with flexibility on terms. With ABL, the company could address its short-term needs, avoid customer service issues and continue to pursue its growth initiatives.
Funding for the assets you have right now
For companies with solid assets and significant growth potential, ABL can be an important financing tool to consider. And for companies that need cash they can turn into sales, profit and growth, ABL can be a game-changer.
Mitsubishi HC Capital America is a commercial finance company that provides customized solutions to help organizations of all sizes accelerate growth. Our experts throughout North America are leaders in the innovative use of ABL. If you would like to find out more about how to qualify for an asset-based loan, contact us today.