Asset-Based Lending (ABL)

Asset-Based Lending (ABL) was once considered a last resort; for companies that couldn’t source finance through conventional methods. However, times have changed, and its once low reputation has turned around.

What exactly is Asset-Based Lending?

ABL generates finance against a company’s existing assets, including stock, debtors, plant, machinery and property. The arrangement is usually in conjunction with debtor finance, factoring or invoice discounting. So, it is most suitable for businesses that supply goods and services on credit, business to business.

High street banks can be reluctant to lend, and when they do, they can charge much higher interest rates. Therefore, ABL has recently become a real alternative for providing finance. Costs vary enormously, but generally the stronger the business, the more negotiating power you will have.

Why is it so useful?

ABL is useful as it provides higher amounts of funding compared to other means of commercial finance. It’s also quicker to obtain than other alternatives. It’s also more flexible compared to other finance options, with fewer restrictions on what you can spend the money. As it’s tied in with the value of accounts, your finance can increase with sales without having to rewrite the underwriting process.

What kind of businesses are suited to ABL?

Although ABL is traditionally aimed at larger companies, due to their existing assets, invoices or inventory, it can be particularly useful for start-up businesses. As sales rise, the availability of finance increases with it. It is ideal for quickly-expanding, profitable businesses struggling to raise funds for new orders until they receive payment for items previously sold and invoiced. Sales-linked finance facilities, such as invoice discounting and factoring, have proved helpful to businesses, allowing them to grow far faster than with a more restrictive, traditional overdraft facility.

Does ABL have any disadvantages?

However, the reverse can also be true, and many established and stable businesses can see their ABL facilities diminish due to falling sales. Lenders generally like a spread of good quality debtors. So, businesses with just a single or a few customers may struggle to get a facility. There’s also the belief that ABL is more expensive than a traditional overdraft. While not always the case, it depends on the strength of the business and its negotiating power in securing a good deal. Debtors should be well-spread, so quality becomes less of an issue.

In summary

Asset Based Lending (ABL) is no longer the last-resort option it was once considered. It can be beneficial for businesses in the start-up stage, or those expanding quickly with a lot of assets to secure it. Businesses with a small customer-base may find the arrangement more expensive than an overdraft. The quality of the deal may also depend on the company’s own strength. That said, it is a very flexible option for raising funding, which could increase as your business prospers.