How Asset Based Lending Companies Can Help Businesses With Cash Flow Problems

What Is Asset-Based Lending and How Does It Work?

Asset-based lending, or ABL, is a unique type of financing option where funding is secured by keeping business assets as collateral. Lenders, who offer such type of funding, usually put more weightage on collateral than income history. Asset-based lending companies tend to look at what a business owns, such as unpaid invoices, inventory or equipment, and, sometimes even real estate, and offers loan based on the value of those assets. 

Do not confuse it with cash flow financing or lending, which is solely based on historical revenues and profit margins of a company. With asset-based lending companies, value of the asset becomes more important than cash flow. Because of this very reason, this type of financing is appealing to companies with irregular income but significant assets. 

Here is a list of assets that are commonly used as collateral in ABL option: 

• Accounts receivable owed by other businesses
• Inventory held for sale
• Equipment and machinery
• Real estate owned by the business
• In some cases, intellectual property

How Do Asset-Based Lending Companies Solve Cash Flow Problems?

In the world of B2B commerce, one will find net-30 and net-60 to be the norm. Under those terms, a firm is free to put an order on the road and send out the invoice, then let a month or two go by before the cash from that sale comes in. The company’s own obligations cannot wait too. There is no waiting period for rent, payroll or what is owed to suppliers. Business owners need funds available to pay them on time or else the entire company operations will come to a halt. That is where asset-based lending companies come in to bridge the divide, turning inventory and receivables into capital the business can put to work while it is still waiting on the customer to settle up.

This is particularly relevant if the figures a bank looks at do not reflect the reality of the business. A traditional lender might shy away from lending due to one bad quarter, even if the balance sheet is good, and looks at trailing revenue. If you have a strong receivables balance, you can continue to get capital when you’re not making money using asset based lenders who make decisions based on the collateral itself.

What Assets Can Businesses Pledge for Cash Flow Financing?

Not every asset carries the same weight with a lender. It comes down to how quickly and reliably that asset converts to cash.

1. Accounts Receivable Financing

For asset-based lending companies, the most sound collateral is to be found in the open invoices of a creditworthy client. These are viewed as such because they can be turned into cash with a degree of predictability. It is no surprise then that receivables will underwrite the bulk of the borrowing power available on an asset-based line of credit.

2. Inventory-Based Financing

Retailers, distributors and wholesalers often borrow against inventory when receivables are not sufficient to meet their needs. Lenders generally consider inventory to be a less certain collateral than an open invoice in that it must be sold before it can be converted to cash.

3. Equipment and Fixed Asset Financing

Asset-based lending companies also offer credit against machinery, vehicles and other fixed assets. This is important for manufacturers and construction companies with heavy equipment on their balance sheets. This is different from a standalone equipment loan where the equipment is in one facility with receivables and inventory.

4. Real Estate and Intellectual Property as Collateral

For asset-based lending companies, property that the business has in its own name is a plus when it comes to determining how much they will lend. Unlike inventory, the worth of such real estate is not subject to the ebb and flow of daily sales. There is also the matter of intellectual property; while not as commonly put up as collateral, it is an option for firms with patents, trademarks or licensing arrangements where the value is well documented.

How Does the Borrowing Base Determine Credit Availability?

The borrowing base is the calculation used to establish how much of the income a business can realistically draw at any point in time. Asset-based lending companies won’t lend the entire value of pledged collateral. The credit line is determined based on the results of applying an advance rate to each asset category.

• As a general rule, receivables carry a higher advance rate than inventory, since collecting on an invoice is more predictable than selling stock
• Receivables that sit unpaid past a certain age typically get excluded from the calculation, since collectability drops the longer an invoice goes unpaid
• Inventory advance rates depend heavily on how easily that specific inventory can be sold and at what price
• Lenders commonly run field examinations to verify that reported collateral actually exists and matches what the business reported

Covenants attached to the facility usually require ongoing reporting on receivables aging, inventory counts, and other balance sheet detail, because the lender's risk moves with the collateral, not a fixed repayment schedule.

What Is a Revolving Line of Credit in Asset-Based Lending?

Asset-based lending companies may offer a revolving line of credit rather than providing the full loan amount at once. The business can borrow when it needs money, repay the amount as customers pay their invoices or inventory is sold, and then borrow again as credit becomes available. This can be useful for businesses that wait a long time for customer payments or have busy and slow seasons throughout the year. Instead of taking on a fixed loan amount, the business has access to financing that can change with its working capital needs.

What Cash Flow Needs Can Asset-Based Lending Companies Cover?

Asset-based lending companies are commonly used to fund recurring and one-time working capital needs, including:

• Payroll during stretches when receivables are outstanding but wages are still due on time
• Restocking inventory ahead of a seasonal sales surge
• Covering supplier payments while customer invoices remain unpaid
• Funding expansion into a new location or product line
• Refinancing existing debt into a single facility tied to collateral instead of income alone
• Getting through a slow season without cutting staff or delaying customer orders

As receivables and inventory increase, credit availability increases too side-by-side. So, a business that is growing its sales volume can often obtain additional capital without having to re-negotiate the entire facility from scratch.

How Should Businesses Compare the Best Asset-Based Lenders?

One should not be too quick to compare asset-based lending companies on the basis of interest rate; they do not all put together their facilities in the same manner and the rate is a weak metric for doing so. It is possible for two to have an identical rate and yet offer very different levels of cash availability from one month to the next. When a business is making its way through an asset-based lenders list, it is better to look beyond what the headline rate says and examine the facility’s construction.

• How advance rates are set for each collateral type, and whether that is disclosed clearly before signing
• How often field examinations happen, since frequent reviews can slow down day-to-day operations
• Whether covenants are reasonable for the business's specific industry and cash cycle
• Direct experience with the collateral type, since inventory-heavy retail differs from receivables-heavy commercial finance
• How draws and repayments actually get processed on a routine basis

You will find asset-based lending companies that work on a far grander scale, putting in place facilities for private equity backed enterprises or seeing an investment bank steer the transaction. But that is not the sort of commercial finance the typical small business owner has in mind. For a smaller concern, the most suitable lender is one organised to make short work of a straightforward balance sheet, as opposed to an outfit designed to manage the intricacies of a full recapitalization.

What Are the Benefits of Asset-Based Lending Programs?

Set against a traditional bank loan, asset-based lending companies tend to offer a few concrete advantages:

• Approval leans more on collateral quality than on credit score alone, which helps a business with strong assets but an uneven financial track record
• Credit availability grows automatically as receivables and inventory increase, without a fresh approval process every time the business scales
• Closing often moves faster than a traditional term loan, since verifying collateral value takes less time than underwriting years of revenue history
• Liquidity stays available on a revolving basis instead of arriving as one fixed sum that has to last through the entire draw period
• Funds can move across payroll, inventory, and expansion instead of one designated purpose

Conclusion

It would be a mistake to think a business is mismanaged on the strength of a cash flow problem. More often than not, the funds are tied up in inventory or receivables and are not yet at hand for use. There are asset-based lending companies who can step in to cover such a gap. By underwriting what a company already has in the way of assets, they make capital available without the need to put in with a bank and wait for an assessment of trailing income or for a tardy customer to settle up. For a firm with solid assets on its balance sheet, it is a sound way to carry on during an uneven cash cycle.