Getting the Most out of an Asset-Based Loan

by Kevin Smith Author

Asset-based loans (ABLs) can expand a booming business or help your company through a financial rough patch. These loans use assets like accounts receivable (invoices), inventory, equipment, and raw materials as collateral. If you pay back your loan on time, you get to keep these assets; if you default on the loan, the lender has the right to take these assets. Essentially, borrowers risk some future profits in order to gain immediate cash. ABLs are easier to get than traditional bank loans and come with a lower APR than unsecured loans. Before you consider taking out an ABL, make sure it fits your business and you know how to get the most out of your loan.

Can an ABL Help My Business?

ABLs are often used to help a rapidly growing company continue to expand. They can also help a company meet immediate short-term cash needs like keeping up with payroll for new employees or increasing inventory. ABLs can stabilize companies that have fluctuating needs and cash flow depending on the time of year or other changing circumstances, such as transportation companies that need to winterize many vehicles. In addition, these loans are a good alternative for people who have trouble getting a traditional bank loan (i.e. their credit score is too low) or need cash faster than the traditional loan process will allow.

Companies with more value in assets, especially accounts receivable, are more likely to get a sufficient amount of money from an ABL. Thus, mid- to large-sized companies tend to benefit most, though some finance companies will give ABLs to small companies.

How to Get a Good Loan

Before you can receive any cash advance, you must prove to the financing company that you are responsible with your finances and likely to repay the loan. When applying for an ABL, make sure you bring well-organized, accurate, and detailed financial information. Demonstrate that you have realistic and well-defined financial plans for the future. Show the lender that you can be trusted to keep track of your finances and your business will use the loan in profitable ways.

Your loan application is more likely to be approved if you have inventory that sells well, customers who pay for the product in a timely manner, good financial statements, and well-organized reporting systems. Even if you prove to be trustworthy with debt, if your major customers aren't trustworthy with debt, it can decrease your chances of getting an ABL.

In order to use an asset as collateral, that asset must not be secured as collateral in any other loan. In addition, your company cannot have any legal or tax problems that could complicate the process of seizing your assets.

The funds you receive will be based on a percentage of the secured assets' value. Typically, you will get 70-85% of the value of accounts receivable and 40-50% of the value of inventory and equipment. The APR for ABLs is usually 7-17%. Some lenders add due diligence and auditing fees to help pay for the cost of determining the value of your assets, monitoring your loan, and securing your assets if you default. Make sure you shop around for the best combination of APR, additional fees, and percentage of your assets' value that will be loaned.

If your business has valuable assets and you want a lower APR without going through the strict process of a traditional bank loan, consider taking out an asset-based loan in Savannah, GA. This quick cash flow can be used for various purposes, from getting a company back on its feet to expanding your business beyond anything you have imagined.