Asset Based Lending - A Flexible Financing Option
Uneven cash flow is one of the biggest pain points for any business owner, and as payment cycles are becoming longer, it is putting more pressure on the cash flow for the businesses. As most of these businesses do not qualify for traditional financing, they need to look for the alternate source of cash flow to provide working capital. Asset based lending (ABL) is a type of lending secured by an asset or collateral. So if the loan is not repaid, the lender takes the asset. It is also known as Commercial Finance or Asset-based Financing.
ABL has matured over the past decade to become a part of the business mainstream, and is no longer the business loan of last resort. ABL uses assets as collaterals, and lender can consider inventory, accounts receivable, immovable property and other assets even if cash-flow or balance sheet of the borrower does not look very lucrative. Hence, lenders can lend to the companies that usually do not qualify the conditions for traditional loans. ABL maximizes the level of available finance against the company's assets, and hence has become popular, especially among middle market companies that are looking for expansion, turnaround, acquisition, merger, management buy outs, refinancing or restructuring. Typically, in asset based lending, the primary transaction size is $500,000 to $7.5 million, business credit type is Line of Credit, Advance formula is up to 90% of eligible Accounts Receivable and up to 50% of eligible inventory, and advance frequency can be daily or weekly.
Established lenders have experience and expertise to give successful ABL loan, and they closely monitor financial performance of the borrower under covenants and liquidity position. These lenders use asset based lending software that offer flexible, advanced and user-friendly field examination, ineligible calculation, data analysis and real-time fraud prevention tools. ABL software solutions save time with built-in word processing, combined tests, intelligent report formatting, live data grids, and several other useful features. Some of the best ABL solutions are competitively priced, have flexible structuring, and have fast closing and response time.
To choose ABL software, ensure that it can process asset based loan, produce timely reports, calculate interest properly, reduce principal accurately and red flag delinquencies, and minimize first-payment default. The ABL software must also be able to track borrower's normal borrowing pattern, frequency of inventory audits, track pre-agreed margins and invoice dates, and rate at which receivables turn over. Asset based lending software should be able to provide the exact status of any loan, at any given time. The solution must also keep track of the actual market value of the inventory, and also the liquidity in case assets need to be seized.
For borrowers, ABL offers flexibility, and access to the capital they would have otherwise never obtained. Also, ABL lenders have become sophisticated and flexible over the years, providing stigma-free source of financing to the businesses. However, in ABL, the lender gains the control of the company's cash flow, and this may be an uncomfortable situation for the borrower. Also, ABLs cost more as compared to traditional loans as there are additional costs such as due diligence fees and audit fees. Another downside of the asset based loan is that securing credit line heavily depends on the quality of accounts receivables.
ABL is now considered a smart financial choice that can help organisations meet their organisational and financial goals. These loans can generate more liquidity for the client as compared to the traditional loan, and work best for borrowers as well as lenders. Lenders and borrowers can work closely to minimize borrowing cost. ABL market is in a good shape currently, and is consistently growing (11% in 2013).
ABL has matured over the past decade to become a part of the business mainstream, and is no longer the business loan of last resort. ABL uses assets as collaterals, and lender can consider inventory, accounts receivable, immovable property and other assets even if cash-flow or balance sheet of the borrower does not look very lucrative. Hence, lenders can lend to the companies that usually do not qualify the conditions for traditional loans. ABL maximizes the level of available finance against the company's assets, and hence has become popular, especially among middle market companies that are looking for expansion, turnaround, acquisition, merger, management buy outs, refinancing or restructuring. Typically, in asset based lending, the primary transaction size is $500,000 to $7.5 million, business credit type is Line of Credit, Advance formula is up to 90% of eligible Accounts Receivable and up to 50% of eligible inventory, and advance frequency can be daily or weekly.
Established lenders have experience and expertise to give successful ABL loan, and they closely monitor financial performance of the borrower under covenants and liquidity position. These lenders use asset based lending software that offer flexible, advanced and user-friendly field examination, ineligible calculation, data analysis and real-time fraud prevention tools. ABL software solutions save time with built-in word processing, combined tests, intelligent report formatting, live data grids, and several other useful features. Some of the best ABL solutions are competitively priced, have flexible structuring, and have fast closing and response time.
To choose ABL software, ensure that it can process asset based loan, produce timely reports, calculate interest properly, reduce principal accurately and red flag delinquencies, and minimize first-payment default. The ABL software must also be able to track borrower's normal borrowing pattern, frequency of inventory audits, track pre-agreed margins and invoice dates, and rate at which receivables turn over. Asset based lending software should be able to provide the exact status of any loan, at any given time. The solution must also keep track of the actual market value of the inventory, and also the liquidity in case assets need to be seized.
For borrowers, ABL offers flexibility, and access to the capital they would have otherwise never obtained. Also, ABL lenders have become sophisticated and flexible over the years, providing stigma-free source of financing to the businesses. However, in ABL, the lender gains the control of the company's cash flow, and this may be an uncomfortable situation for the borrower. Also, ABLs cost more as compared to traditional loans as there are additional costs such as due diligence fees and audit fees. Another downside of the asset based loan is that securing credit line heavily depends on the quality of accounts receivables.
ABL is now considered a smart financial choice that can help organisations meet their organisational and financial goals. These loans can generate more liquidity for the client as compared to the traditional loan, and work best for borrowers as well as lenders. Lenders and borrowers can work closely to minimize borrowing cost. ABL market is in a good shape currently, and is consistently growing (11% in 2013).
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