Asset-based lending is a type of alternative financing that uses collateral to provide better loan terms. This can help your company grow in several ways, from purchasing equipment to boosting your revenue.

To get the most out of this flexible lending option, you need to use it the right way. This article explains everything you need to know about ABL financing.

What Is Collateral?

The first thing you need to know to get started is what collateral is. Your business probably has several valuable assets you can use as collateral, including pieces of equipment, heavy machinery, inventory, real estate, and even unpaid invoices.

Collateral involves using these assets as a guarantee for payment of the loan. With asset-based lending, the size of the loan provided is usually based on a portion of the asset’s value. For example, you could use real estate worth $100,000 to obtain a loan for $60,000–$80,000.

Why Use Asset-Based Lending?

ABL financing fills a need that many companies have: working capital. Even when your business has plenty of sales, you may not have cash on hand to take care of expenses. This cash flow problem can appear when it takes too long for your customers to pay you.

Other times, business owners require a large infusion of capital upfront if they want to generate profits. This is common with inventory purchases. You need a lot of money to buy inventory at a discount, but once you sell it you can easily make back what you spent and a large amount of profit. ABL lending helps you get the initial funds required.

How Can Asset-Based Loans Improve Your Cash Flow?

If your company is running into cash flow issues, it can seem like the deck is stacked against you. For one thing, getting a traditional loan is usually out of the question because banks want to see perfect cash flow to approve loans. At the same time, you need additional capital to correct the cash flow problem, so you’re stuck in an endless loop.

ABL financing helps you skip this problem completely. You choose when to get the funds, not relying on the payment schedule of your customers. In turn, the more revenue you have, the less you end up relying on outside financing for good cash flow.

How Can You Use Asset-Based Lending Correctly?

Use ABL financing to stabilize and strengthen your cash flow, not as a band-aid for poor sales. Use the loan for short-term needs with fast turnovers, such as inventory or monthly operating costs. That way, you have incoming payments that you can use to pay off the loan quickly.