Asset Based Lending
Asset Based Lending refers to a business loan or credit line secured by using a company’s assets as collateral. This allows a company to immediately access the working capital available in their assets, such as Accounts Receivable, Equipment and Inventory. Asset Based loans can be structured as revolving credit facilities, allowing a company to borrow from assets on an ongoing basis to cover expenses or investments as needed.
This type of financing is used by companies that need working capital to operate or grow, in some instances these businesses may have reached the limit on their bank line of credit. Often, companies that implement ABL have cash flow problems, many of which stem from rapid growth. Asset Based Lending facilities help companies manage their rapid growth issues and position them in a favorable position for future growth.
How Does it Work?
A preferred lender of South Point Equity will establish a revolving line of credit (revolver) to maximize the availability of working capital from the company’s asset base. The borrower then grants the lender a security interest in the items being used as collateral, such as Accounts Receivable, Equipment and Inventory. A value is given to each asset, and a percentage of the value of the asset is made available to the borrower as a line of credit. A typical revolver structure will make available 90% of the Accounts Receivable, 75% of Equipment, and 50% of the Inventory value.
When the borrower needs additional working capital, they request an advance, and the capital is sent directly to the borrower’s bank account. The borrower can request as little or as much capital, depending on what their needs are at any given time. This allows for control of the amount of capital borrowed, thereby lowering the cost of financing.
As the borrower manufactures or acquires new inventory, and as they generate receivables from sales, these new assets become available for inclusion in the borrowing base. The line of credit is then paid down overtime by collecting on inventory and outstanding receivables.
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