Choosing an asset-based lender to plump for can be daunting, particularly if you don’t have much experience with lending. Making a comparison can be hard, so what is it and what should you look for?
Simply put, an asset-based loan (ABL) is a business loan secured on business assets. Plant and equipment, vehicles, stock and property can all be used as security for an asset-based loan. It is also possible to borrow against intangible assets like brand names and other intangible assets. Construction equipment, manufacturing and engineering machinery are all well liked for asset-based lending.
An asset-based loan can be used to help buy new equipment, or existing equipment can be used as security for a loan to fund business expansion or refinancing. Assets are at risk if a loan is not repaid. It is also possible to secure a loan against commercial or residential property. This type of loan would take a charge against equity in the property. Lenders have different interest rates and loan to value ratios, so it is important to shop around.
The asset-based lending market has matured significantly in the last twenty years. Once considered part of the alternative finance market, it has now moved in the mainstream, offered by independent finance providers and the High Street banks alike.
According to ABFA, the Asset Based Finance Association, there was £4.25 billion worth of asset-based loans made in the year to March 2018, a 10% increase on the year. As at 2014, the total asset-based finance market (including invoice finance / factoring) was estimated to be 15.7% of the UK’s GDP (BNP Paribas). ABL is common in service, manufacturing and distribution sectors and 80% of companies using ABL have a turnover or £5m or under.
The process of applying for an asset-based loan is very similar to that of any business loan. An application form is completed. It is then passed to a credit controller for an initial check. Depending on the type of assets involved and the lender’s familiarity with these assets, a Chartered Surveyor will be asked to provide an asset valuation. If the information provided by the surveyor’s report supports the loan, the application will be passed back to underwriting to be approved.
An asset-based loan holds several advantages over a traditional loan. The recent performance of the business is less of a factor as the lender has the security of the assets. This makes asset-based lending particularly useful to new or fast-growing companies with insufficient trading history to satisfy traditional business loan criteria, a business which is fighting back from a difficult period, or where the unexpected has happened and the business is looking to refinance.
Getting good advice to help you through this process can be helpful in avoiding problems later. Finding an FCA regulated broker might be a useful first step. Brokers work with a range of lenders, giving you more choice than going to a lender directly. Brokers are also well placed to find you the best match between your requirements and available products and they understand the way individual lenders work. This can help with borderline decisions. A broker can present you with a range of options, make a recommendation, tell you when you have the best deal, and give you comfort in your decision. In this way, brokers offer a service which should find you the best deal on the market and save you time and money.
Rob Carter of Synergy Commercial Finance says,
“Speak to an FCA regulated broker. Customers should also choose the most appropriate length of loan. The longer the loan period, the lower the monthly repayment, which helps cashflow, but it will cost more overall. A shorter repayment period will reduce the total cost, so pay as much as you can monthly, but don’t overstretch yourself.”
Our top tips if you are considering taking on an asset-based loan is look for an FCA regulated broker and insist on an RICS regulated Chartered Surveyor to undertake the asset valuation. If you are looking for accessible funding to quickly to fund growth, an asset-based loan might be your golden ticket.
This article was published on the website of the Business Post on 21st November 2018.