In asset-based lending (ABL), financing is secured by specific tangible assets on a company’s balance sheet. Lenders focus on the liquidation value and quality of these assets to determine borrowing capacity. The four primary types of business assets typically accepted as collateral include:
- Accounts Receivable: These are considered the most liquid and preferred collateral class. Because they convert into cash through normal collection cycles, they typically command the highest advance rates (70%–90%). Lenders evaluate them based on aging reports and customer concentration.
- Inventory: This includes finished goods, raw materials, and work-in-progress. Inventory is subject to third-party appraisals to account for obsolescence and turnover velocity, with typical advance rates ranging from 40%–60%.
- Equipment: Machinery and vehicles are valued based on their orderly liquidation value. Lenders generally extend 50%–80% of the appraised value depending on the age, condition, and secondary market demand for the equipment.
- Real Estate: While this is the slowest asset class to fund due to the need for title searches and environmental assessments, it offers substantial long-term value. Typical advance rates for real estate fall between 60%–75% of the appraised value.
In some complex transactions or M&A scenarios, certain structures may also accommodate intellectual property as a specialized form of collateral.
Related FAQs
-
What are the Risks Involved in Implementing a Supply Chain Finance Program?
Read More »: What are the Risks Involved in Implementing a Supply Chain Finance Program?Implementing a supply chain finance program involves several categories of risk that require structured management to ensure program stability. These risks include: Counterparty Risk: This involves the potential for a buyer’s payment default or credit downgrade. Strategies to mitigate this…
-
What is the Difference between Equipment Financing and an Equipment Lease?
Read More »: What is the Difference between Equipment Financing and an Equipment Lease?The primary difference between equipment financing and an equipment lease lies in ownership, structural mechanics, and tax treatment. Equipment financing is a loan secured by the equipment, which results in the borrower owning the asset outright after the final payment…
-
How does Equipment Financing Help a Business Preserve its Working Capital?
Read More »: How does Equipment Financing Help a Business Preserve its Working Capital?Equipment financing helps a business preserve its working capital by spreading the cost of an asset over time through regular, manageable monthly payments. Unlike an outright cash purchase, which drains liquidity immediately and redirects substantial cash away from vital operational…
-
What are the Tax Benefits or Depreciation Advantages Associated with Financing Business Equipment?
Read More »: What are the Tax Benefits or Depreciation Advantages Associated with Financing Business Equipment?Financing business equipment offers several tax and depreciation advantages that can improve after-tax cash flow. Key federal provisions include the Section 179 deduction and bonus depreciation. Under Section 179, businesses may elect to deduct the full purchase price of qualifying…
-
Can Equipment Financing be Structured with Seasonal or Deferred Payment Plans?
Read More »: Can Equipment Financing be Structured with Seasonal or Deferred Payment Plans?Yes, equipment financing can be structured with seasonal or deferred payment plans. Many lenders accommodate businesses with cyclical revenue by allowing for higher installments during peak periods and reduced or skipped payments during slower months. Additionally, some providers offer deferred…