The Pros and Cons of ABL
When used properly, asset based lending, commonly referred to in the financial realm simply as ABL, can be extremely beneficial to both mid-size and large corporations. However, companies should be aware of the advantages and disadvantages of using asset based lending.
Pros of ABL
The most obvious advantage to using an asset based loan is that when it is approved, it can provide an immediate source of working capital. Since it is not a traditional loan, it also goes through a much quicker approval process. Not only is the loan easier to obtain, but it also easier to increase as assets from the company increase.
A second advantage is that ABLs offer greater flexibility of spending. Unlike traditional loans that have to be locked in with a specific purpose, ABLs can be used as long as they can qualify as a business expenditure. Businesses who are looking into this type of lending should verify which purchases qualify.
Another important positive impact of asset based lending is that it allows a company to improve its credit portfolio. An asset based loan can improve a company’s credit rating over time, especially since the principal balance paid gets recycled into a revolving line of credit, which allows for rapid growth and expansion without taking on debt.
Cons of ABL
Business owners should also be aware of the risks involved with asset based lending. The worst case scenario with an asset based loan is that the borrower could eventually forfeit their collateral. Remember that an asset based loan looks at the fixed assets owned by a company, so defaulting on payments could result in the forfeiture of equipment, inventory, and property.
A second disadvantage of an asset based loan is that a company can actually over-mortgage its loans. In this scenario, the company could potentially owe more on the loan than the value of the assets used as collateral. In cases like these, the company loses even more money than it did prior to accessing the loan.
Another possible downside is that while an ABL will eventually help your credit and your company in the long run, it is a secured loan, which doesn’t increase the immediate value of the company. In essence, companies who use an ABL are trading goods for liquefied assets. However, since ABL provides a revolving line of credit, drawing from it as a renewable source of capital often outweighs the time it takes to build credit scores. Additionally, since asset based lending provides a revolving line of credit, the source of capital goes much further than finite funding from traditional bank loans.
Asset based lending is a great option for companies, if properly utilized. However, borrowers should take the pros and cons of ABLs into consideration, and contact an experienced lender for all the details before committing to one.
To learn more about Asset Based Lending contact Bull Market Capital: Business Funding Solutions today.