Here are the 3 steps to apply and get approved for an asset-based loan
Applying for an asset-based loan may appear to be a cumbersome and slow process, but by following these steps, you will be able to get approved quickly and with fewer headaches.
Asset-based lending (ABL) prioritizes your business assets that can be used collateral; lenders care less about your personal credit history and business financials (e.g. time in business and cash flow history). If your business has accounts receivable, inventory, machinery, equipment or real estate, you are a prime candidate for taking out an asset-based loan. This type of loan is structured as a flexible facility that is typically composed of a revolving line of credit (backed by accounts receivable and inventory), and sometimes includes term loans on fixed assets.
Each application process will have its own requirements and timing, but by following these steps, you will put yourself in a position to expedite the process and get your funding faster!
- Compile your financial documents
In order to successfully get funded by an asset-based lender, you will have to present a clear snapshot of your business. The easiest way to so is to have a robust set of documents that show the financial status of your company. A key benefit of ABL is that these documents will not make or break your chances of getting a loan, but rather paint a picture in the eyes of the lender that will help them have a strategy to fund your business.
Documents may include:
- Balance sheet – One of the most critical documents to show an asset-based lender. This is the clearest way for the lender to see your assets which in turn will determine the collateral and loan amount. A clear breakdown of asset type and amount will lead to the most accurate advance rates.
- Financials and sales – Forecasts, historical performance, and tax returns help to round out the financial picture for the lender. Different lenders will have different requirements, but by having these documents up to date and ready to submit, you can expect an easier and quicker process.
- Appraisals and ownership documents – for any machinery or equipment that you would like to use as collateral, a clear valuation and history of service will speed up the underwriting process.
- Expand Asset Analysis
Assets are the backbone an any asset-backed loan; providing a clear picture of value will yield the highest advance amount and most flexible line of credit. As mentioned above, balance sheets and valuations are a good first step to the applications process. But now, its time to dive in a little further.
Four ways to expand your asset analysis includes:
- Determine the amount of assets that you feel comfortable as collateral. Asset-based lenders care most about accounts receivable but will consider most types, so be prepared to submit a mix of assets.
- Confirm there are no liens against assets being submitted for this credit facility. The lender will perform a UCC-1 search to understand if you have pledged collateral to other lenders and are “double dipping” on the same assets. You can check your lien status at any time in a UCC database. If there are outstanding debts that appear in these databases, it is important to confirm if they are legitimate with current or past lenders.
- Break out finished inventory and raw materials. Lenders will not advance against any work-in-progress inventory since the resell value would be difficult to determine.
- Provide an accounts receivable aging report. This shows the current outstanding invoice balance with the term of each and any that are past due or have been written off.
The application process for an asset-based loan will be more rigorous than a traditional unsecured small business loan or invoice factoring. Since ABL is based on collateral, a deep dive into your company’s assets is necessary to secure funding. The initial application will typically be online and require the previously mentioned documents to be submitted along with additional company information.
Depending on the lender and types of assets being collateralized, the lender may require on-site audits to review inventory, machinery or property. This relationship will exist moving forward if audits are required in the future, so it is important to get to know the auditor and what their job will look like in subsequent audits.
After all is said and done, the lender will present you with a loan offer. It will have clear terms, costs, size, and collateral used. There will be a plethora of documentation to explain the ABL relationship looks like and what it will cost you. Due to the flexibility of an ABL facility, the structure may change in the future. This can change how much can be offered and how it is paid back. This flexibility is beneficial to the borrower because it can provide fast financing on top of the original asset-backed loan.
The ongoing relationship between lender and borrower will allow for you to constantly have access to additional working capital. Unlike traditional small business loans that are stand alone, the flexibility of an asset-based loan will allow for faster borrowing in the future.