What is an asset-based line of credit?
An asset-based line of credit is oftentimes an attractive option for many companies. Perhaps your business has underperformed for a couple of months and you have run into some cash flow problems? Or perhaps you just need capital to finance your expanding business? Whatever the case, an asset-based loan (ABL) could assist.
What is it? An ABL is a type of lending based on a company’s assets. It’s the process of loaning cash to a business but securing that loaned cash with collateral from that business. Collateral could be; inventory, accounts receivable, equipment, or property owned by that business. Most of the time, due to the need for collateral to secure the loan, asset-based lending is given to more mid-sized or established companies with a good customer base and solid financial records. There are some pros and cons to borrowing money this way.
Pros of an asset-based loan (ABL)
- An ABL is immediate. The approval process is quicker than with traditional loans and it’s easier to obtain. As the assets of your company increase, so can your ABL.
- An ABL offers greater flexibility in spending, as long as the money spent qualifies as legitimate business expenditure.
- An ABL can improve a company’s credit score over time because the principal balance paid goes into a revolving line of credit. Therefore a company can grow and expand without taking on debt.
Cons of an ABL
- If you are unable to pay back the monthly installments this could result in forfeiture of your equipment, property, or other assets used as collateral.
- An ABL is more expensive than the cost of a traditional bank loan due to the higher degree of risk – lenders have to trust heavily in the expertise of those running your business and it’s functionality (assets could be worth less than the loan given if a company is mismanaged)
- A business or company can over-mortgage on their loan and potentially owe more on the loan than the value of its assets. In cases like this, the company can lose (and owe) even more money than it did before it secured the ABL.
At Kore Capital, we specialize not only in asset-based lending but also in factoring services and various other lines of credit to suit your company’s needs. Contact us today for a factoring rate quote or to find out if you qualify for an asset-based loan.