Business Leader looked at asset-based loans (ABL) and how companies can benefit from this financing leverage.
Asset-backed loan is a type of business loan that uses the borrower’s assets as collateral to secure the loan.
To acquire an asset loan, a business can use tangible capital assets (assets that have physical value) such as machinery or property to secure it. Intangible assets (non-physical assets) such as patents, trademarks and software can also be used. So, if a business does not repay the loan, its assets are used to cover the lender’s losses.
Asset loans are a great way for a business to increase its working capital, which is the difference between a business’s current assets and its current liabilities.
How big is the market now?
In the UK, the asset lending and invoice factoring market is over Â£ 300 billion. Invoice factoring is a specific type of asset-backed loan that involves a business selling unpaid invoices to a third-party company. The value of unpaid invoices is used as collateral for an asset loan.
Why Businesses are Great for Asset Lending
Stable small and medium-sized enterprises with valuable physical assets are the most likely to resort to borrowing against assets, typically to meet short-term cash flow needs. However, larger companies occasionally acquire them for their own short-term needs.
There are very few restrictions on how the money raised by asset-backed loans can be spent; if a business is having cash flow issues, asset-based financing can provide it with funding to cover its expenses; if a business wishes to expand its business by acquiring a new restaurant, the loan can also be used for this purpose. Large companies looking to finance a large merger could also use an asset-based loan to help raise the required capital.
Asset loans can also be used in conjunction with other types of financing, while many asset loan providers offer a fixed repayment period. Therefore, it is easier for companies to develop their business plan after loan repayment.
What are the trends now?
Like much of the business community, asset-based lending has also suffered the wrath of the COVID-19 pandemic. The resulting lockdowns mean that the number of businesses using asset-based lending has declined in line with business activity levels. For example, in December 2019, 39,128 companies were using asset-based loans at the end of the quarter, up from 36,135 in December 2020.
While we have yet to see activity return to pre-COVID-19 levels, it will be interesting to see if asset lending facilities increase now that the majority of restrictions have been lifted.
Asset loans can be a great way for businesses to increase their working capital. Whether it’s to cover short-term cash flow issues or to fund a large merger, they can be of tremendous benefit to small, medium, and large businesses. Asset loans generally have lower interest rates than unsecured loans because the lender can recoup most or all of their losses if the borrower defaults. But as with any form of financing, it’s important to consider all of the potential risks when determining if this is the most appropriate option to finance your business needs.