Asset based lending (ABL) refers to any form of lending given out by an agreement secured by collateral. That is, before these loans are given, they have to be backed by collateral. This collateral includes assets such as inventory, accounts receivable, equipment, properties that are offered by the borrower as security for the loan being taken out. Also known as asset based finance or commercial finance, asset-based lending gives loans to businesses to enable them meet their cash flow demands.
Loans are secured by these assets and as such if these loans are not repaid, the assets are thus taken by the lender. Asset based loans are used by companies seeking working capital for their operation and growth. Often times, these companies may have cash flow problems which often stem from rapid growth and as such they may eventually require alternative funding and as such apply for asset based loans.
These loans are often offered to small and mid-sized companies that are both stable and can be financed. However, once these loans have been pledged as collateral to one lender, they can no longer be pledged as collateral to another lender.
In order to understand whether or not these asset based loans are suitable to small scale businesses, it is essential that an understanding of the advantages and disadvantages of these loans to small scale enterprises be understood.
Advantages Of Asset Based Lending To Small Businesses.
For small scale businesses seeking alternative funding, asset based lending is one way of obtaining these needed phones. These asset based loan facilities provide quite a number of benefits for small and medium scale enterprises. These benefits include:
- Improved Cash Flow
One major problem faced by small and medium scale enterprise is the problem of unavailability or insufficient funds needed for the smooth operation of the company. Without this funding, it might be very difficult for the company to finance its operations. As the company grows, so also does its financial needs grow.
As such, asset based lending provides this required funds thus improving the business’ cash flow. With these funds, the business can adequately run its affairs without any form of financial hindrance, thus allowing for the business’ continuous growth without hitches.
This loan therefore allows for the growth of small scale business and as such is a perfect fit for them.
- No Need For Credit Or Loss History
It is much easier to obtain asset based loan as a small scale enterprise over other forms of loans. Asset based loans have less stringent criteria that must be met over other forms of credit available to businesses.
Unlike other forms of lending, asset based lending has no concern with the credit or loss history of said business. This is what makes it a good fit for small and medium scale enterprises, especially those businesses that have just started and barely have credit history or cash flow status.
Rather, asset based lending is concerned with the asset value of said business. That is if your business is just starting and has assets that can be borrowed against, then asset based lending is just the debt finance you need to provide you with needed funds to continue running your business operations.
As such once a business has highly valued and easily liquidated assets; such business can apply for these asset based loans regardless of just how long such business has been in existence. It can also be used as a stepping stone to other sources of credit.
- Low Interest Rates
Compared to other forms of loan finance, particularly unsecured loans, asset based loans have less interest rates. These reduced interest rates are particularly due to the fact that these loans are backed by assets which are of the same or above value and highly liquefiable. As a result, the lender’s money is safe even in a situation of default repayment.
Hence, lenders are more comfortable loaning out money using asset based lending as they are guaranteed that their money would be refunded either by repayment or by liquidating the assets used as collateral. Whichever way, they bear no loss.
Asset based loans have very flexible repayment plans which are in turn quite convenient for small scale businesses. Short term asset based loans are easily paid off from accounts receivable and inventory. These asset based loans also have fewer covenants than other conventional credits hence, it is easy for you to manage them and stay in line.
Disadvantages Of Asset Based Lending To Small Businesses
However, while asset based lending holds quite a number of advantages for small scale businesses, there are however still disadvantages attached to these asset based loans in relation to small scale businesses. These disadvantages include:
As these asset based loans are backed by collateral in the form of business assets, in case of default payments, the assets would be seized and eventually liquidated. This could have tremendous impact on your business as not only does it lead to a loss of business assets, you could even end up with a debt if the sale price of the asset does not cover the outstanding loan.
- Low Valuation
If the assets used as collateral are lowly valued, this could also affect the amount being offered as a loan. That is assets of smaller value definitely means substantially reduced amounts and if the assets’ value does not increase, then the loan’s value also does not increase.
Asset based loans are generally more expensive and might take a longer time as the assets have to be evaluated and valued before these loans are given out. This therefore means that more money would be spent on paying experts to value these assets and it might even take more times.
Small businesses often require alternative funding and as such begin to seek other options. For small businesses, particularly those with little or no credit history or cash flow records who have business assets, asset based lending is generally a much viable source of loan finance. Its lower interest rates as well as flexible payments all make it a match for these small scale businesses. However, this is not to say there are no problems with asset based lending for small businesses. The advantages however overwhelm the disadvantages.