Posted on: 27 January 2015
If you are seeking to finance the purchase of new equipment for your business, you might want to consider an asset based loan (ABL).
What is an asset based loan?
An asset based loan is a business loan secured against company assets. Asset based loans are set up to offer a revolving line of credit. This means that a business is allowed to borrow money secured against its assets to meet expenditure or investment as required on an ongoing, rolling basis. An ABL can provide a useful injection of finance to a business that is experiencing temporary cash flow problems or that needs working capital for growth and expansion through the purchase of new equipment.
What types of businesses qualify for asset based loans?
Asset based finance is usually offered to stable companies of small to medium size that have assets available for financing. These assets may be in the form of premises, high-value plant and machinery, inventory and accounts receivable. Any assets that are to be used as collateral must not already be pledged to another lender, nor must the company have any major tax issues, legal cases outstanding or accounting problems that could mean the assets are encumbered.
The 'borrowing base'
The borrowing base refers to the amount the lender will offer you as a loan. The borrowing base is calculated on the determined value of the assets you have pledged as collateral. In the case of accounts receivable this figure is usually between 75% and 85%. For equipment and inventory the figure is lower, at around 50% or less.
The borrowing base fluctuates because the value of the assets against which it is secured are variable. This is because of depreciation of plant, variation in property values linked to the general economy and settlement of receivable accounts. For this reason, your lender will regularly inspect your company ledgers and assets to update the value of the borrowing base while the loan is in force.
Due diligence and the cost of the loan
Before an asset based loan can be offered, the lender will complete its 'due diligence' process. This process enables the lender to determine the value of your assets, check for encumbrances on the collateral and inspect your company accounts.
The cost of your ABL will be dependent on how much you are borrowing, the type of assets you have and the perceived risk to the lender. In general, loan costs are calculated using the annual percentage rate (APR) which can be anything between 7% and 17% depending upon current market conditions.
If you are seeking finance for the purchase of new equipment for your company and your business owns significant assets, an asset based loan might be the ideal solution. Contact your business financial advisor to determine whether an ABL would be right for you.
For more information, contact a business such as SMA Finance.Share