21. March 2012 09:51
Asset-based lending is a form of line of credit, and is sometimes called a revolving line of credit. In essence, asset based lending looks at your company's current assets, and then provides you funds up to a certain amount depending on the value of those assets. Because asset based lending is a line of credit, the the borrower and lender will have an ongoing relationship and will be in fairly close contact. The borrower should be able to receive more funding as needed, up to the pre-agreed limit. In addition, it may be possible for the borrower to increase their credit limit if additional assets are acquired.
Defining An Asset
Technically, any asset could be considered for asset based lending. In that sense, mortgage loans are a form of asset based lending – but they are rarely referred to as such. In most cases, ABL involves receiving financing against the current assets such as accounts receivable and inventory. The idea is to obtain financing based on expected money to be paid once invoices come due at a later time. The company receives funds from a lender now and turns over the funds from those invoices once they do become available. Asset based lending can sometimes involve other assets such as machinery and equipment, but accounts receivable is the most popular.
A Highly Reactive Line Of Credit
One of the common characteristics of asset based lending is its ability to increase or decrease as a company's invoices increase or decrease. Because the amount that can be borrowed is determined by the expected value of the asset, i.e. the amount expected from invoices, higher or lower invoices thus lead to higher or lower levels of funding. This is particularly useful to seasonal business, high growth businesses, or companies that have a opportunity to grow. Because asset-based lending is typically more focused on collateral and less on the financial performance of a borrower it also creates opportunity for highly leveraged borrowers or companies in turn around to arrange liquidity.
As with all types of funding, the details of asset-based lending can and do vary between different companies. To learn how Crestmark can help your company, we encourage you to contact us via phone or email for more information.