Unlike a traditional bank loan, which is approved based on a borrower’s balance sheet ratios and cash-flow statements, an asset-based loan (ABL) is granted based on the tangible assets that a borrower can offer to secure the loan.
Borrowers can put up equipment, inventory, accounts receivable and other liquid assets in exchange for the financing they need.
Manufacturers, wholesalers, retailers, and some service companies are prime candidates for asset-based loans because they have assets like inventory and equipment that can be sold and turned into cash within just a few days. Asset-based lenders set up their loans so they can seize and sell a borrower’s assets rapidly if the borrower fails to make payments, and they charge relatively high-interest rates.
Since the Great Recession, credit has tightened so dramatically that banks often turn down solid borrowers who have significant assets because they don’t have financial ratios or cash-flow projections that fit into the banks’ rigid, one-size-fits-all lending criteria. Ironically, sometimes a company is turned down for a bank loan because it is growing too fast–and is having cash flow problems, as a result. Asset-based lenders have stepped into the breach to provide the working capital companies need to operate and grow. Asset-based lenders help companies manage rapid growth issues by providing them with the funding they need to fill new orders and develop new facilities.
“Asset-based lenders help companies manage rapid growth issues by providing them with the funding they need to fill new orders and develop new facilities.”
As asset-based lending has grown in popularity, asset-based lenders have discovered that over time the value of a borrower’s assets tends to be quite stable, even through economic and business cycles
. This means asset-based loans are relatively uncorrelated to market swings, which is very helpful if you’re seeking to give your investment portfolio some protection from the ups and downs of the stock market.