In the world of business financing, asset-based loans (ABLs) stand out as a great option for companies seeking to leverage assets for growth and stability. These loans, secured by collateral such as accounts receivable, inventory, real estate, and equipment, work as revolving lines of credit, allowing a company to borrow and repay continuously as needed. ABLs offer unique advantages that make them appealing to a broad range of businesses—particularly manufacturing companies.
Let's dive into the nature of ABLs and explore the reasons behind their popularity—including why they’re particularly attractive for manufacturing companies.
What are Asset-Based Loans?
Asset-based loans are a type of financing where the loan is secured by a company's assets. They work as a revolving line of credit, so the company can borrow and repay the outstanding balance continuously as needed. Unlike traditional bank loans, ABLs are primarily focused on the value of the borrower’s collateral and may not require compliance with covenants or performance metrics that banks typically focus on. This type of lending is particularly beneficial for companies that have substantial, high-quality assets but may not have the metrics a traditional bank may require.
Key Characteristics of Asset-Based Loans
- Collateral-Driven: The amount that can be borrowed is directly tied to the value and mix of the assets provided as collateral. Common assets include accounts receivable, raw materials inventory, finished goods inventory, machinery and equipment, and real estate.
- Flexible Utilization: Funds from asset-based loans can be used for all business expenses. This can include payroll, accounts payable, purchasing new inventory or paying for inventory that was purchased previously on terms, refinancing existing debt, or making term debt payments. An ABL is a revolving line of credit that gives you continued access to funds for daily, weekly, or monthly expenditures.
- Structured Financing: The loan structure will be tailored to meet your company's specific business needs, and the money available from this credit line will grow as the assets continue to grow.
Why Asset-Based Loans are an Attractive Lending Option for Manufacturers
- Improved Cash Flow: Asset-based loans enhance a company's cash flow. Leveraging assets and being able to borrow against them allows a business to meet day-to-day expenses and provides the ability to seize growth opportunities with fewer cash flow constraints. The manufacturing industry requires significant upfront costs to acquire equipment, rent or purchase production facilities, and purchase materials, making access to working capital crucial for success.
- Higher Borrowing Amounts: Compared to traditional bank loans, asset-based loans are primarily focused on your business's assets. This means a higher chance of approval. And because the ABL lender better understands the collateral they are lending against, often the advance rates on the collateral can be higher than a typical bank facility.
- Flexible Repayment/Borrowing Terms: The repayment and borrowing terms for asset-based loans align closely with the assets that are pledged. As accounts receivable payments are made by your customers those funds are applied to reduce the loan amount eliminating the need for you to make a specified loan payment each month. As new accounts receivable are invoiced additional money is available to draw from the line.
- Fast and Efficient Approval Process: The approval process for asset-based loans can be quicker than that of conventional loans. Since the emphasis is on the collateral's value, lenders can expedite the evaluation and approval process, providing businesses with faster access to funds.
- Flexibility with How Funds are Spent: Asset-based loans can be utilized for needed expenditures at your discretion. This allows you to plan and prioritize the payments needed for your business. These expenditures can include purchasing new inventory and equipment, expanding operations and entering new markets, paying payroll, hiring more employees, and covering all of the day-to-day bills.
Ways to Maximize the Benefits of ABLs
To maximize the benefits of ABLs, companies should fully understand the value of their assets, regularly monitor them, and work with a lender who will assist them.
Ready to explore Asset-Based Loans for your company? Commercial Funding Inc. can help.
Asset-based loans are an excellent solution for manufacturers looking to leverage their assets for capital. Their accessibility, improved cash flow management, higher borrowing limits, flexible terms, and quick approval processes make them appealing to a wide range of companies. By understanding the unique advantages and potential considerations, businesses can make informed decisions about whether ABLs are the right fit for their financial strategy.
Commercial Funding Inc. (CFI) is ready to provide customized, flexible financial solutions for your company. Learn more about how an ABL from CFI can help your manufacturing company get working capital to take your business to the next level.