There’s a careful balance between the borrower and lender with any loan. On one hand, borrowers need money for important business goals or purchases. Lenders can provide the capital, but they also need a guarantee that they’re going to get their money back and make some profit.

The Need for a Guarantee

There are two main ways lenders try to reduce the risks of financing. One is to carefully check the credit score of all borrowers. A company’s credit rating is an estimation of how well it manages funds and how likely it is to repay a loan. Lenders are more willing to provide a loan if a business has built a good reputation for paying back money.

What if a company needs financing but doesn’t have an excellent credit rating? This can happen because of past debt problems or because of being relatively new to the industry. In that case, lenders usually look for collateral to help mitigate risks instead. Asset based financing involves this type of arrangement.

The Question of Collateral

So, what is collateral? It refers to a business asset that helps to secure the loan. If a business doesn’t repay the loan, the lender can take the collateral instead, sell it and get at least some of the money back.

Businesses can use many assets as loan collateral, including business equipment, heavy machinery, inventory and real estate properties. Some lenders also accept accounts receivable, or unpaid invoices.

The main factor to look for when choosing collateral is to make sure the item is easy to appraise and sell if necessary. Items such as construction equipment or agricultural machinery are good for collateral because they hold their value well and have strong demand.

Asset Based Financing Details

ABL financing revolves completely around collateral. This option extends a loan to business owners based on the value of their chosen collateral. This way, both sides win. The company can get flexible capital right away, even if its credit rating is subpar. The lender has the guarantee it needs to ensure repayment of the loan.

The process of applying for ABL financing is relatively easy. Businesses can either offer a piece of collateral in exchange for working capital or use the item they want to purchase as collateral for the loan. Many businesses turn to ABL financing to buy inventory for resale. It can also help with real estate purchases, remodels and sales.