Asset based lending is a great financing alternative your business may be able to utilize to meet its business goals. An asset based loan (ABL) uses company assets, such as accounts receivable or inventory, to secure the loan. ABLs can either be loans against fixed assets or lines of credit, but most are structured as revolving lines of credit. Despite ABLs being a flexible alternative to traditional bank financing, negative myths about asset based lending and lenders exist. Allow me to disprove these myths.
Check out our Business Owner’s Guide to Asset Based Lending.
Myth #1: Asset based lenders are where inferior companies turn when they can’t get traditional bank financing.
A common myth is that only companies in financial trouble use asset-based financing. In reality, healthy companies are choosing asset based financing to meet their credit needs. A company may choose to stay with an asset-based lender, despite being able to qualify for a traditional bank loan for a number of reasons:
- Asset based loans provide greater flexibility. A company still retains a great deal of control over their financing decisions and has a greater focus on their cash flow.
- The company only borrows money when they need it due to the nature of a revolving line of credit (RLOC). This allows the company to better manage the cost of their financing.
- With ABL’s, there are far fewer financial covenants. At VCF, we are often able to work with the company through various points in their business or cash flow cycles without additional worry on the company’s behalf about which financial covenants they may be violating.
- Security and risk aversion purposes. In the event of a financial crisis, your loan is always backed by the collateral you already own.
- Companies can gain greater loan availability through higher advance rates. This is especially true for asset-rich companies who possess large amounts of accounts receivables and inventory.
An asset based lending facility may be the best way to maximize your company’s borrowing capacity.
Myth #2: Asset based lenders are only concerned with the value of the collateral.
There’s a misconception that asset based lenders make lending decisions solely on collateral value. It is true that asset based lenders must have collateral, whether it be Accounts Receivable or Inventory to back the loan. However, many things are considered when evaluating a business for an ABL loan.
Asset based lenders develop an understanding of many types of businesses. This allows them to assess the collateral and appropriately adjust the market value of the pledged assets which in turn provides for availability. The more quality collateral a business has, the more availability they can generate, thus increasing borrowing capacity to support cash flow.
However, while asset based lenders rely on the collateral they also evaluate the financial performance of the company. If the company has recently lost money, the lender must determine if the business plan to turn it around is achievable. The lender will also consider the strength of the leadership team, the reason for the working capital need and whether the business is a fit for that individual lender. While a company will consider an asset based loan for many reasons, such as expansion or taking advantage of supplier discounts, the ABL lender develops a complete understanding and knowledge of the company and its business in structuring and approving a financing facility.
Myth #3: Asset based loans are too expensive.
Like traditional loans, asset based loans use annual percentage rate (APR) pricing. Risk, line size, and other factors may affect the pricing. It’s true that ABL interest rates may be higher than those offered by banks on traditional secured loans. However, they are competitive rates in comparison to unsecured loans which represent a higher risk to the business and its owners or to equity which may not be in the best interest of the owners in the long-run.
Although asset based loans may appear more expensive, our flexibility and customization allow us to work with you regardless of previous difficulty securing traditional bank financing and work with you during future challenging periods. We can be your consultative partner helping you enhance your cash flow while letting you keep control of your financing decisions. Thanks to our years of experience working with hundreds of businesses—just like yours—across a range of markets and industries, we can help you achieve your business goals.
Explore the potential of an asset based loan
With common myths about asset based lending dispelled, you can now pursue this type of financing with more awareness and confidence. If you look at the facts, you’ll quickly see why asset based lending may just be the best option for you and your business. Take advantage of the opportunities you may miss by not securing the financing you need—contact VCF today at 804-897-1200.