In this beginner's guide, we will explain asset-based lending in terms of how it works, its advantages, and disadvantages, among other perimeters. But first, let's take a look at how asset-based lending works.
When a borrower makes an application for an ABL, the lender will start by analyzing the value of their assets. Once the valuation is done, the lender will use this value as collateral to fund the loan.
You may be wondering if this type of loan is right for you. There are several advantages to using asset-based lending to consider in regard to your current situation.
Asset-based lending is quicker and easier to process than a traditional loan. This is because the borrower's assets are used as security to fund the loan. So, there is no need for a third-party guarantor for the loans.
Since asset-based transactions are covered by security, lenders will be less concerned about how good a borrower's credit history is.
The other advantage of ABL is that they charge lower interest rates than other types of loans. This is because lenders are not concerned about the creditworthiness of their customers.
While asset-based lending has its strengths, like all financial decisions, it has its risks and drawbacks as well. Here are a few to watch out for.
One of the main disadvantages of asset-based lending is asset seizure. As we already discussed, ABL is secured by collateral. Therefore, if the borrower defaults on the loan, the lender can seize the collateral to cover a default.
It is important to note that not every asset qualifies to be used as collateral. Most lenders do focus on high-value assets, and this can be limiting for some borrowers.
Asset-based lending is a good loan option for borrowers who need urgent cash and those with bad credit history. So long as you are willing to respect the terms and conditions, you will easily manage the demerits of this type of loan.
How Asset-Based Lending Works
When a borrower makes an application for an ABL, the lender will start by analyzing the value of their assets. Once the valuation is done, the lender will use this value as collateral to fund the loan.
Usually, lenders will be willing to loan borrowers up to about 90% of the value of their collateral. The terms and conditions of these loans, however, do vary based on the value and type of the security.
In most cases, lenders will prefer high liquid assets that can easily be converted into cash in case of a default. These assets include accounts receivable, inventory, real estate, equipment, and machinery.
The Advantages of Asset-Based Lending
You may be wondering if this type of loan is right for you. There are several advantages to using asset-based lending to consider in regard to your current situation.
Faster Approval Times
Asset-based lending is quicker and easier to process than a traditional loan. This is because the borrower's assets are used as security to fund the loan. So, there is no need for a third-party guarantor for the loans.
Therefore, the process of approving such loans will take less time compared to traditional loans. This also makes it a practical option for those in urgent need of cash.
Suitable for Bad Credit Borrowers
Since asset-based transactions are covered by security, lenders will be less concerned about how good a borrower's credit history is.
Relatively Low Interest
The other advantage of ABL is that they charge lower interest rates than other types of loans. This is because lenders are not concerned about the creditworthiness of their customers.
Whether you need staff agency business financing, want a loan for expansion, or for any other reasons, the ABL will offer the best financing rates. It can be particularly helpful for business financing if you need a quick cash boost to get your business up and running.
The Disadvantages of Asset-Based Lending
While asset-based lending has its strengths, like all financial decisions, it has its risks and drawbacks as well. Here are a few to watch out for.
Asset Seizure
One of the main disadvantages of asset-based lending is asset seizure. As we already discussed, ABL is secured by collateral. Therefore, if the borrower defaults on the loan, the lender can seize the collateral to cover a default.
Not All Assets Qualify For ABL
It is important to note that not every asset qualifies to be used as collateral. Most lenders do focus on high-value assets, and this can be limiting for some borrowers.
Final Thoughts
Asset-based lending is a good loan option for borrowers who need urgent cash and those with bad credit history. So long as you are willing to respect the terms and conditions, you will easily manage the demerits of this type of loan.
As a beginner, we hope this post has given you enough information and insight about ABL to make more of an informed decision.
