While the economy continues to improve, traditional lenders like banks still continue to use near-impossible criteria to approve loan applicants. Many small business owners today simply cannot meet these requirements and must look elsewhere for financing.
For many of these entrepreneurs, the answer to their funding dilemmas lies with the assets they already have in their possession. They can use these assets to secure an asset based loan and get access to money that they need to grow their businesses and reach new levels of profitability.
Asset Based Loan Process and Approval
Before business owners apply for asset based financing, they should understand whether or not they are good candidates for this type of transaction. A business should ideally be past its initial start-up phase and have reached a point to where it can be considered a mid-sized company.
Further, business owners who are good candidates for ABL funding should:
- Have assets that are marketable
- Possess accounts receivable, inventory or equipment that is free from liens
- Practice good collection and invoice strategies
- Have solid financial statements
If they can meet these criteria, they may be eligible to apply for and receive financing based on the value of their assets rather than their cash flow.
Uses for Asset Based Financing
Along with using the funds to boost their cash flow, company owners can also utilize their ABL financing for other important purposes. Some of the more common business-related reasons that people apply for and take advantage of this source of cash include:
- Gaining working capital to pay everyday expenses or make improvements at their business
- Buying more assets and making investments
- Undertaking a leverage buyout of another small business
- Purchase equipment
Even more, unlike loans from banks, people who use asset based lending for any of these purposes enjoy benefits that arguably are not available with other forms of financing. Some of the better known benefits of an ABL include:
- Easier qualification criteria, including more relaxed credit guidelines
- Flexibility to use money however the payee sees fit
- Lower financial ratios, such as debt-to-worth or working capital ratios
- Less involvement from the ABL lender
Essentially, an ABL gives the applicant the freedom to focus on running his or her business without having to account for how the money is being used or the fear that the lender will interfere with or make a claim in how the company operates.
Asset Based Lending Practices Today
These companies at one time were less than eager to take on significant amounts of risk and even less willing to venture into niche markets. However, ABL businesses today are known to help entrepreneurs whose inventory include everything from frozen fish to imported food products from South America.
In fact, these types of businesses benefit because their ABL financing gives them access to raw materials and inventory that otherwise would not have been possible had they resorted to relying on traditional lending products like bank loans. This source of funding gives business owners the flexibility to operate niche or seasonal companies while securing asset based lines of credit or term-like financing by utilizing assets like:
- 30-day net invoices
- Real estate, although this asset arguably is utilized in rare instances to secure financing.
The value of these assets determine the amount of money that is extended to the business. In most cases, invoices are paid out at about 80 percent of their market value while inventory and equipment are paid at a rate of 30 to 50 percent of their liquidated value. Additionally, payments are set up to accommodate the income coming into a business, and most factors allow up to 84 months for the account to be settled. This flexibility in payment differs from a bank, which typically requires a set monthly payment regardless of how much profit a company takes in.
With banks and traditional lenders continuing to employ impossible approval criteria, small business owners can use their assets to secure a different source of financing. They can determine if they and their businesses are suited for asset based funding by learning about the guidelines and benefits of this transaction.