The Differences Between Asset-Based Lending and Traditional Lending
At some point in their business operations, every business owner will need external funding.
While traditional bank loans are commonly sought after, startups and small businesses may have difficulty qualifying for traditional financing due to minimal or lack of business credit history. Thankfully, traditional loans are no longer your sole option of business funding. These days, businesses looking for funding have a plethora of alternative financing options to choose from, such as asset-based lending.
This article will explain some of the differences between asset-based lending and traditional lending.
Asset-based lending (ABL) is a financing option that can be structured as a line of credit or loan and is secured by your company’s assets. Typically, business owners pledge their accounts receivable as collateral, but other assets such as inventory, equipment, and real estate are also eligible. As with any secured loan, the ABL lender will have the right to seize your pledged assets in the event of nonpayment.
The amount of an asset-based loan will be based on the total appraised value of the collateral, with liquid assets being more highly valued. That is why accounts receivable, which has high liquidity, is commonly pledged as collateral.
Banks are usually the first place that businesses are seeking funding. However, bank funding can be difficult to obtain. Traditional lenders will primarily look to your business credit history, company operations and future cash flows before looking at your collateral. This can make it difficult to obtain traditional financing if you have bad credit or have only been in business for a short duration, both of which are usually the case for startups and small businesses.
Asset-based lending, unlike traditional financing, has far more flexibility in lending standards, structure, and use of proceeds. Although your creditworthiness is still considered, ABL lenders will also look to the quality of your collateral, which can make it easier for startups and small businesses to qualify for ABL. In addition, ABL can be structured either as a loan or as a line of credit and you can use the proceeds however you want - provided they are business expenditures. With bank loans, you are restricted to using the funding for a specific purpose.
Another key difference is that the approval time for ABL is much shorter than for traditional financing, which is immensely helpful for small businesses seeking immediate access to funding to supplement their working capital. The bank’s lending process is long and cumbersome, often taking up to several months.
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!