Asset-Based Loan An Overview of Asset-Based Loans
Author: Grant Olsen
Date posted: 08.08.21

An Asset Based Loan (or ABL Loan) is a bank loan secured by assets of your company. Unlike an SBA loan or term loan that generally require real estate collateral, ABL loans can be secured by a wide range of assets – inventory, equipment, accounts receivable etc. They typically go as high as $10 million, with a loan to asset-value ratio of up to 85%.

Asset-Based Loan

Asset-based loans are a family of products that share a key similarity: the financing is secured with an asset provided by the borrower.

 

Potential assets that can secure the loan include vehicles, machinery, inventory, or even your accounts receivable. For example, if you were to secure the loan with your construction equipment, you might be able to borrow somewhere around 50% of its value. If you instead used accounts receivables, it could be possible to borrow more like 80% of its value.

 

The interest rates vary widely for asset-based loans. The best products might offer 6% interest rates to qualified borrowers, while other loans might reach 30% for certain borrowers.

 

Likewise, there is a substantial range when it comes to the terms for asset-based loans. When accounts receivable are used as collateral, the terms are usually shorter. If you were to use machinery, on the other hand, the terms might start at 5 years or go as long as whatever the machinery’s project life might be.

What Is an Asset-Based Loan?

While there’s a collection of various financing products that fall under the definition of asset-based loans, the 2 most popular are business term loans and lines of credit. In the case of term loans, you would repay the loan’s advance (plus interest) over the agreed upon term.

 

A line of credit works differently, as you don’t receive a lump sum like you would with a term loan’s advance. Instead, you’re given access to a credit line and can draw from it whenever necessary. You’ll only owe interest on the money you decide to use.

 

Whether you get a business term loan or a business line of credit, the assets that you used as collateral serve as the guarantee. If you were unable to make your required payments, the lender could take possession of the asset.

 

 

Using an Asset-Based Loan

Asset-based loans are often used to obtain working capital. Maybe your cash flow is struggling due to a slow sales season or the need for unexpected repairs to crucial equipment. Or you might be training new employees or upgrading your business’s technology.

 

Whatever the situation, asset-based loans provide convenient access to cash that can help you shore up your business operations or take advantage of new opportunities.

Applying for an Asset-Based Loan

Lenders will view your business as a strong candidate for asset-based loans if you’ve been operating for at least 2 years, make $500,000 or more annually, have a healthy credit score and sufficient (and suitable) assets to secure the loan.

 

The specific application documents required vary from lender to lender, but you should prepare the following for your application:

 

  • Business plan
  • Proof of cash flow, profit and loss, and balance sheets
  • Credit reports
  • Personal and business tax returns for the past 2 years
  • Personal financial statements
  • Projected financial statements
  • Business bank statements
  • Debt Schedule

 

Having these documents ready in advance will streamline your application process and help you avoid mistakes.

About The Author | Grant Olsen

Grant is a writer specializing in small business loans, leadership skills, and growth strategies. He is a contributing writer for KSL 5 TV and has been featured on FitSmallBusiness.com and ModernHealthcare.com. Grant has a B.A. in English from Brigham Young University.

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