Pros and Cons of Asset-Based Lending
Asset-based lending (ABL) is a type of alternative financing that is structured either as a loan or line of credit and is collateralized by a company’s assets. Asset-based financing is often used to supplement working capital and fund business expansion, as business owners can use their current assets or assets they intend to purchase as collateral to secure an asset-based loan.
In this article, we go over some of the pros and cons of ABL:
The most obvious advantage of asset-based lending is that when it is approved, it can provide an immediate source of working capital. The approval process for asset-based loans is much quicker than it would be for traditional loans. Asset-based lending is a particularly effective option for seasonal businesses seeking additional funding to match the sudden growth in demand or to counteract an unexpected lull in demand.
Another advantage is that it can be easier to qualify for asset-based lending. Since assets are pledged as collateral, asset-based lenders are more willing to look beyond an unstable financial record and bad credit as long as a business has a strong pool of assets to pull from.
Many business owners find asset-based lending an appealing financing option because it offers greater flexibility in terms of how you can spend the proceeds. Unlike traditional loans whose proceeds can only be used for specific purposes, asset-based lending can be used for anything provided it qualifies as business expenditure.
An asset-based line of credit is a beneficial financing option for borrowers because you can withdraw any amount whenever you want and interest will only be charged on the amount withdrawn.
The obvious downside of an asset-based loan is if you are unable to repay the loan, then you lose your pledged assets. In addition to being financially deficit enough to be unable to make payments and losing your pledged assets, your business and personal credit scores are also lowered similarly to if you defaulted on any other type of business loan.
Compared to traditional loans, asset-based lending may also have high costs. The price of the loan can vary, meaning the interest rate can potentially be much higher than initially expected. Asset-based loans sometimes come with additional fees, such as audits, and due diligence fees.
Accel Business Funding has provided business loans and business lines of credit through asset-based lending and has funded many businesses for more than $380 million. When banks say NO, we say YES to funding in 24 hours!