As you may have guessed from the name, asset based lending is a type of loan that relies on business assets for approval. These assets are called collateral. The more you understand about ABL financing, the easier it is to use and the more your business can benefit from the terms. This article answers many common questions about asset based loans.

What Are the Differences Between ABL Financing and Other Loans?

What makes an asset based loan stand out is the weight it gives to collateral for approval. With most loans, the main factor for getting approved is your credit score. This is great if you have amazing credit, but it’s not so wonderful for small businesses that don’t have the best credit rating. Traditional financing also has a long application and approval process.

With asset based lending, the primary factor for approval is how valuable the items are that you’re offering as collateral. It’s much easier to qualify for ABL financing, even if you have a spotty credit history. ABL funds are approved much faster as well.

Of course, with this convenience comes added costs. That’s why businesses generally use this option as short-term funding instead of long-term financing.

What Things Can You Use as Collateral?

The type of asset you offer depends on your business, the size of the loan you need and your goals. Many items work great with ABL financing, from unpaid invoices and inventory to equipment and real estate. Sometimes, you can even use high-value, easy-to-sell items such as jewelry, luxury goods and vehicles, but you have to reach out to the lender specifically to ask about it.

How Can You Use ABL Financing for Your Business?

It’s common for businesses to use unpaid invoices (also called invoice financing) as a way to get a fast infusion of capital. This can help you balance your cash flow without going through the hassle of getting a working capital loan.

Asset based lending can help you purchase inventory to meet increased customer demand. This is a big help during seasonal surges or emergency orders. You get the funds you need, sell the inventory right away, pay off the loan and have a tidy profit to take home.

It’s possible to use the item you’re interested in buying as collateral for an asset based loan. This is the principle behind equipment financing and hard money real estate loans. You get better rates than normal, have help buying what you need and qualify without needing a perfect credit score.