How Does Asset-Based Lending Work?

Every business has ups and downs financially. The tricky part is overcoming the hard times successfully and taking advantage of the good times to grow.

One problem can be slow periods of sales. Some industries often experience seasonal slowdowns, such as landscaping companies and construction businesses. Another issue can be market changes.

If your business is feeling the pinch, a loan can be a game-changer. With funding, you can get an infusion of capital to cover operating expenses, purchase inventory and continue generating revenue.

The big question is whether you can qualify for a loan when your business is going through tough periods. With asset-based lending, the answer is yes.

What Does Asset-Based Lending Involve?

The main thing that sets ABL financing apart is the way it helps businesses qualify for funding. Traditional loans focus almost completely on your company’s current financial health, factors such as its credit rating, cash flow and revenue. The problem is that these factors are often exactly why you’re applying for a loan in the first place!

Asset-based loans place less emphasis on your credit score or revenue. Instead, they’re based on the value of a business asset as collateral, such as equipment, real estate or inventory.

These are things many established businesses have available, including small businesses. For example, if a construction business needs a loan urgently, they can use ABL financing with an old-but-valuable piece of heavy machinery.

What Are the Downsides of Asset-Based Lending?

Considering how flexible ABL lending is, it’s not surprising that there are both pros and cons to this option. Compared to traditional loans, the loan terms are shorter. This means you should only use ABL financing when you’re confident you can generate enough revenue to pay back the funding relatively quickly.

What If Your Company Doesn’t Have Assets for Collateral?

This is where the flexibility of alternative business financing solutions shines. In addition to using business assets you own as collateral for a loan, you can also use ABL financing to purchase business assets you need. In this case, the item you’re buying acts as collateral for the loan.

This way, small businesses can buy the equipment they need to stay busy. They can adapt to market changes by offering new or different services.

This technique often works for inventory purchases and real estate needs as well. House flippers can use ABL financing to purchase, remodel and resell properties. Sales companies can increase their available inventory, deliver products on time and make money.