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Asset-Based Lending vs. Traditional Bank Lending: Which is Right for You?

November 13, 2021
By James Gussie

Traditional banks have been the main source of credit for centuries. In recent years, that closed-loop system has started to crack as both traditional banks and other institutions increased their lending to individuals. Asset-based lending is a new form of decentralized loans which allow borrowers access to funds from many investors who share in total risk with others on the platform.

Asset-based lending is a type of lending in which the borrower’s assets are used as collateral for the loan. Traditional bank lending is when banks lend to individuals or companies based on their income and credit score. Read more in detail here: what is traditional lending.

Traditional unsecured bank loans are typically the least expensive type of borrowing accessible to businesses looking for funding to sustain and expand their operations.

Many small companies, on the other hand, are either:

Rapidly expanding,
If you don’t have a lot of experience, or if you don’t have a lot of experience,
Have a credit rating that isn’t high enough

As a result, traditional bank loans are frequently denied to these businesses. This is particularly true in the years since the financial crisis, when lenders have become more cautious in their loan approvals.

Additionally, some companies with existing bank lines of credit may be unable to acquire additional money from the bank since the bank will not extend credit beyond the present level. As a result, the bank will not fund their future expansion.

So, what should a business do when client receivables are 60 to 90 days past due, or even longer, and the company is faced with a substantial working capital shortfall? In such cases, companies may look for other forms of financing, such as asset-based lending (ABL), which may be able to fulfill their extra funding needs.

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What makes asset-based lending different from conventional lending?

ABL is a much more flexible way to fund a company’s current operations as well as its future expansion needs. Asset-based loans, unlike traditional bank lending, are based on the collateral put up for the loan, rather than the borrowing company’s operations and future cash flow projections. The most common type of ABL is one that is made against a company’s receivables. The lender advances funds to the borrowing company based on the value of the receivables it has received. Advance rates are often in the 70 percent to 90 percent range. The creditors pay the lender, and after the money are collected, the lender returns the remaining amount to the borrower, less the costs it charges for the loan and handling the collections process.

An asset-based loan is usually a revolving line of credit that is renewed when the collateral, such as receivables, is paid down. Despite the fact that asset-based lenders lend against a variety of assets, including inventory, capital equipment, and real estate, receivables account for the majority of collateral for these loans, owing to their higher liquidity.

The loan application procedure

Asset-based lenders are more concerned with the quality of the collateral than with the borrower’s cash flow or credit score. To assess creditworthiness, they look at the creditor’s capacity to pay and their payment history in the past. Internal bank lending rules restrict traditional bank lenders.

Banks, for example, will not lend to businesses with debt-to-capital ratios of more than four or five to one. Independent asset-based lenders, on the other hand, are not bound by such restrictions, allowing them to fund many small businesses that are undercapitalized or otherwise do not meet traditional bank lending criteria but are good businesses with promising long-term prospects.

ABL’s Benefits to Borrowers

Asset-based loans help borrowers in a number of ways. ABL offers immediate and ongoing cash flow liquidity for a company’s working capital needs, such as purchasing goods and supplies, meeting seasonal demands, paying wages and other operational costs, and keeping accounts payable current.

While a bank’s lending process can be lengthy and inefficient, taking up to several months in some cases as the bank examines the borrower’s financial statements, credit history, and overall business, asset-based lending takes significantly less time to complete. Furthermore, because ABL loans are secured, lenders are more willing to be flexible and work with borrowers during times of financial hardship when the company’s finances are stretched.

Because asset-based loans are based on the quality of the collateral rather than the borrower’s operating performance, fewer financial covenants are required of the borrower, and compared to traditional bank lending, ABL lenders typically require a much lower level of reporting back to the lender.

While each business’s borrowing strategy should be unique and tailored to its specific needs, borrowers seeking working capital financing should seriously consider the advantages of working with an asset-based lender, as it can provide greater flexibility and options for businesses looking for alternatives to traditional bank lending. In the comments section below, tell us which financing approach has worked best for your company.

Do you need assistance in obtaining a loan? Check out the Bplans Loan Finder and our Small Business Loan Guide.

Asset-based lending is a way to borrow money by using digital assets. Asset-based lenders are not interested in the borrower’s credit score, which makes it more accessible for borrowers with bad credit scores. Traditional banks, on the other hand, have strict criteria that they follow when deciding whether or not to lend money. Reference: best asset based lenders.

Frequently Asked Questions

Is Asset Based Lending a good career?

A: Asset based lending is a financial institution that loans out assets, typically money or securities. Its like the loan equivalent of investing in stocks. If youre good at spotting trends and can read market fluctuations well, asset based lending might be something for you.

Is asset based lending risky?

A: Asset-based lending is a type of loan that uses collateral to determine the interest rates. This means that if an asset such as stocks, patents, or property declines in value it will trigger a loss for the borrower and vice versa.

What is the difference between ABL and revolver?

A: The first difference is that a revolver only shoots one bullet at a time. An automatic bi-pod, on the other hand, can fire multiple shots in quick succession without stopping to reload.