If your company is asset rich and cash challenged, then an asset based loan maybe a perfect fit for you.
Asset-Based Lending Defined and its Usage
Asset-Based Lending is a specialized method of providing structured working capital and term loans that are secured by accounts receivable (A/R), inventory, machinery, equipment and/or real estate. This type of funding is great for startup companies, refinancing existing loans, financing growth, mergers and acquisitions, and management buy-outs (MBOs) and buy-ins (MBIs).
These loans put more emphasis on the quality and quantity of the borrower’s collateral rather than on the financial strength of the company. In addition, many lenders will not be concerned about the personal credit of the borrower.
The Process of ABL Origination Process
We search out a lender (contact our network of lenders or research new commercial lenders).
We prepare and submit your credit package (Narrative, financial statements, financial schedules, projections, etc.) to our recommended lender of choice. This is the time to sell the lender on why you are a “good fit” for them. Your package will be organized,
If you are a candidate for the lender, they will issue a proposal with credit limit, term, collateral included, advance rates, interest rates, points, reporting requirements, covenants and due diligence fees. This is the time for negotiation of terms and having knowledge of what to look out for comes in handy. If a deal is struck, you will execute the proposal, pay diligence fees and schedule a site visit for a collateral audit. The proposal will include a variety of fees depending on the lender may include but not limited to: application fees, origination, due diligence, underwriting, collateral monitoring, loan management, credit facility and banking fees.
If you successfully complete the collateral audit, loan documents are prepared for execution. Upon execution, you are funded your desired level less outstanding fees. Advance rates vary from lender to lender as follows: A/R 60-90% of eligible A/R depending on the type (Commercial, Medical, Construction, etc.); 35 to 65% of eligible Inventory and up to 65% of eligible machinery & equipment. The operative word in funding is “eligible”.
The Mechanics of Asset Based Loans
Asset based and conventional financial statement lenders use what is called a “borrowing base certificate” to document eligible assets. This form contains beginning balances of assets plus/minus net changes less ineligible assets. The result is net eligible assets available for funding. The advance rates are applied against each asset class to provide “actual cash available” for borrowing. The process is more involved than this simplified explanation, but not very complicated.