Asset-based lending (ABL) is a form of financing used by small businesses that allows them to access capital in the form of assets such as inventory, accounts receivable and equipment. Businesses use ABL to increase their working capital and provide additional funds when they need them to expand operations or purchase new assets.
Understanding the Ins-And-Outs of Asset Based Lending
Before committing to asset-based financing, it’s important for business owners to understand what it involves and how it works. First, the lender applies a percentage rate to the value of the business’s assets – this rate is known as an advance rate. The lender then either provides a loan based on that percentage or issues a line of credit for the same amount.
The money obtained from ABL can be used for almost any purpose related to running the business, from paying off debt to expanding operations. But keep in mind that with ABL, businesses are not necessarily given access to all of their assets; instead, only certain types are eligible for leverage. Commonly accepted types include accounts receivable, inventory and equipment.
One major benefit of asset-based lending is that it offers businesses greater flexibility than traditional forms of financing do. It also requires less paperwork than other types of financing, making it attractive for those who need quick access to money without going through a drawn-out process. Additionally, interest rates tend to be more favorable than those associated with alternative loans because borrowers are using their own assets as collateral against the loan – meaning there is less risk for lenders if payments don’t go through on time or at all.
Things to Consider
When considering ABL, there are also some potential pitfalls business owners should be aware of before signing on with a lender:
- You may have less control over certain aspects of your company because you will have to report your assets regularly and follow specific guidelines laid out by your lender in order to remain eligible for the loan or line of credit;
- If you default on your loan agreement or fail to meet periodic payment requirements (i.e., quarterly or monthly), you could find yourself facing steeper fines or penalties; and
- Due diligence measures like appraisals may be required in order for your application to go through – this can add significant cost onto your total loan amount if not accounted for carefully in advance!
For entrepreneurs looking into asset-based lending as a means of providing working capital or access additional funding, understanding these pros and cons is key – because what might appeal to one business owner might not suit another’s needs perfectly. In any case, getting advice from an experienced financial consultant such as the experts at Array Financial prior to entering into any kind of agreement is strongly recommended. This will help ensure you’re making an informed decision about how best to manage your finances!
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