Understanding Asset-Based Lending and Revolving Lines of Credit for Your Business
Asset-based lending (often abbreviated as “ABL”) offers a resourceful way for companies to secure funding. While community banks typically insist on businesses being profitable before they consider lending based on asset coverage, ABL provides an alternative financing route that is not strictly bound by the company’s profitability.
This type of lending essentially allows you to leverage different kinds of assets as collateral. The versatility of ABL often sees it taking the form of a revolving line of credit. This setup empowers businesses to draw funds as required, fostering a dynamic financial environment to meet ongoing needs without repeated loan applications.
Experienced ABL lenders determine what’s known as a “Borrowing Base” using a weekly assessment of your assets. They apply a simple calculation:
Calculating Your Borrowing Base
- Start with 85% of the value of your current accounts receivable.
- Add 30% to 50% of the value of your current inventories.
- The sum of these amounts represents your Borrowing Base.
The essence of this borrowing base formula is to give your business access to funds based on the value of tangible, liquid assets. It’s a scalable and flexible solution for growth-focused entrepreneurs who have substantial accounts receivable or inventories but need more liquidity to propel the business forward.
Are you ready to unlock the potential of asset-based lending for your venture? Explore how a revolving line of credit could be your ticket to optimized cash flow and accelerated growth.
For example:
$1,000,000 of AR * .85 = $850,000
PLUS
$500,000 of INVENTORY * .50 = $250,000
BORROWING BASE = $1,100,000
However, if the current loan with your community bank is $1,000,000, this would need to be paid and it would only give you $100,000 of working capital.
The financial partners at Select Capital can also leverage the value in your equipment and owner occupied real estate to provide additional capital using the formula below:
50% of owner occupied real estate PLUS 75% liquidated value of equipment EQUALS Additional Borrowing Base.
For example:
$1,500,000 of Owner Occupied Real Estate * .50 = $750,000
PLUS
$300,000 of EQUIPMENT * .75 = $225,000
ADDITIONAL BORROWING BASE = $975,000
If you use Select Capital for your ABL needs in this example, you would receive $1,975,000 in total funding compared to $1,000,000.
NOTE: A company only pays interest on what is currently being used on the revolving line of credit… this is not a term loan where you are locked into fixed monthly payments for the entire amount. Use what you need to and payback when you collect receivables.
Asset-based loans can be used by companies in the following industries:
- Manufacturing
- Distribution
- Logistics
- Transportation
- Business Services
Asset-based loans can be used by companies in the following situations:
- Limited operating history
- Rapid growth
- Transition or turnaround
- Acquisition
- Recapitalization
Asset based loans are a great alternative for rapidly growing companies, or those that are highly leveraged, undercapitalized, in turnaround or recovery cycles, or otherwise not bankable.
Companies that have cash tied up in raw material and finished goods inventory or that experience seasonality or significant gaps in cash outlay and cash receipts are also good candidates for asset-based loans.
Call us today to discuss your options with experienced owner operators here at SELECT CAPITAL