Asset-Based Lending is a category of debt financing in which emphasis is placed on the assets of the borrower rather than its credit-worthiness. The lender's credit analysis focuses on the ability of the lender to fully recover its loans upon the enforcement of its security by way of a sale of the assets. By contrast, conventional financing places emphasis on the ability of the borrower to repay its loans from its cash flow. Accordingly, asset-based lenders may lend in the face of losses where conventional lenders will not. As a result of this emphasis, asset-based lenders always require first priority security over the assets comprising the collateral for the loans. It is also typical for the lender to conduct extensive due diligence with respect to the borrower's assets to assess and reduce any risks that could limit recovery upon enforcement.
The ABL practice area generally includes the representation of domestic and foreign banks and financial institutions, as lenders, and corporations and other entities, as borrowers. ABL transactions can take on a variety of forms including:
As well as debtor-in-possession financing and can be based upon operating assets, fixed assets or a combination of both. Asset-based lending lawyers also work on the provision of transaction structuring advice, drafting and negotiating transaction documents, due diligence, taking and perfecting security, and providing legal opinions in connection with the loan transactions.
Please note that the Lexpert Directory has a separate section for the best Banking and Financial Institutions lawyers.
Asset-based lending lawyers define asset-based lending (ABL) as a loan secured by an asset/s of the borrower or debtor as collateral or security to the said loan. In some cases, multiple or large amounts of loans or even a credit line may be issued to the borrower or debtor if multiple assets or assets of high value are provided as security. The only requirement or condition in an asset-based lending is that when the borrower or debtor fails to pay or defaults on their payment as agreed upon by them and their creditor or the financial institution extending the loan, the property secured will be repossessed by the latter.
This type of borrowing is usually done by businesses-owners who finds themselves in a situation where expansion of the business is wanted, has lots of assets as their disposal, but has difficulty in capital or liquidity. It is also considered as an alternative lending to the traditional lenders or banks.
Asset-based lending lawyers can help in representations of both lenders and borrowers alike, starting with applications, legal documents needed, and up to the negotiations and mediations, especially when problems arise that needs legal solutions. See our list of the best asset-based lending lawyers in Canada below.
Assets used as collateral or security in an ABL depends upon the amount of loan to be borrowed by the debtor or borrower. It is of proportionate value to the security or collateral – the higher the loan amount, the higher the asset value should be.
Examples of assets that are usually used in an ABL are:
When borrowing equipment/s through ABL instead of cash, the collateral or security may be against the leased equipment itself, and defaulting on the loan would result in the repossession of the said leased equipment.
The pros of ABL are following:
Assets owned by a business-owner can be used to facilitate loans through ABL. These assets, either personal or fixed, which may be idle or are seldomly used, are put to good use to increase the business’ capital to finance the things needed for expansion, such as additional inventory, equipment, increase in employees’ wages or hiring of new ones, and other operating expenses. That is why it is important for business-owners to have a good grasp of the values of their properties in the balance sheet to easily identify which asset/s can be used as security.
The process of ABL is faster and easier, compared to traditional lending, since there’s security involved which is usually the most important requirement. Other than the asset as security, other requirements such as credit profiles are usually foregone with. However, this depends upon the financial institution or lender that the business-owner is dealing with. This puts asset-based lending as a flexible financing tool providing options for business-owners in acquiring capital based on their current properties. As such, it becomes an alternative source that can be availed of other than most traditional capital lenders.
Where there is a possibility of a higher amount when borrowing through ABL, having the option between traditional and alternative sources of loans provide borrowers additional capital for other purposes. Such purpose may be when there are seasonal peaks of a business which needs capitalization, or when there is a merger or acquisition requiring large payments or set offs, or where there is unprecedented growth providing for a new opportunity for the business to expand.
Since the loan in an ABL is already secured, chances are the interest rates that would be offered is lower compared to that of the traditional lenders. Furthermore, the more liquid the asset, the less risky the loan is, which would also result to a lower interest rate. But some financial entities may tend to have a fixed interest rate for asset-based loans, especially for those which will consider the borrower’s credit profile.
However, ABL also has its cons, such as:
When business-owners engage with ABL, there is always the risk of losing the property used as a collateral or security to the creditors or lenders once there is default in the payment. Which is why there is a need to be proactive in the preparation of the agreement terms and conditions, especially the payment schedule, to prepare the business and to not lose the said asset. And while it is uncommon, or maybe even rare, there may be lenders who are willing to offer redemption of the repossessed property acquired by the lender after there is default on payment. Although, this would be last resort for business-owners since it would be another burden if such would happen.
If you are looking at the pros and cons of asset-based lending, it is recommended that you speak with an asset-based lending lawyer near you. The list below can assist you with locating one.
Asset-based lenders in Canada can range from the traditional lending institutions (i.e., banks) to alternative financial entities (i.e., other thank banks). Whatever the case may be, lenders tend mostly look at two things before approving an ABL transaction – asset value and credit profile.
First, since the security or collateral is the deal-breaker in asset-based lending, lenders will look at the value of these assets. Some assets would have higher value than the other assets – these are cash equivalents, liquid assets, or physical assets, such as equipment, automobiles, or land. Hence, the valuation of the assets to be offered as security, mostly done by the lenders, is one of the most important things to look at.
Secondly, as mentioned above, although some might forego looking at the credit profile or history of a borrower, lenders might still want to investigate it. It depends on the history of the borrower with that lender, and if there is such history, then if there is faithful compliance with the set payment schedule in the previous loans. In totality, the relationship between the lender and the borrower are considered when reviewing the credit profile or history.
An asset-based lending lawyer can work for either the borrower or the lender. They will be skilled in the application of asset-based lending laws from either side of the equation.
Choosing the right lender that would provide for the specific needs of a borrower is important, considering the many factors of ABL – including the interest rate, manner of payment, assets to be used as security, and the borrower’s credit history and profile whenever applicable.
Currently, while banks do offer ABL, there are also other options such as the alternative financing institutions offering the same. In the case of the latter, there are lenders who specialise in the area of asset-based lending which may be more beneficial than the other. A skilled asset-based lending lawyer will be able to help you determine which is the correct path to take.
Want to know if asset-based loans are good for you and your business? Contact one of the best asset-based lending lawyers as ranked by Lexpert using the list below.