Many small business owners have questions about any kind of loan. With asset-based lending, there are even more questions floating around. It’s important to separate myth from reality. Knowing the truth about ABL financing can help you make smart plans, manage your finances wisely, minimize costs, and, ultimately, make your business grow financially.

Why Are They Called Asset-Based Loans?

One of the most common questions involves the names of this type of financing. Some lenders call them asset-based lending, others use the term ABL financing and still, others call them hard money loans. All these loan options work in the same way: basing the loan on a piece of collateral.

Assets are items that your business owns. For example, heavy machinery or manufacturing equipment are assets. So are certain types of vehicles, such as delivery trucks, semi-trucks, flatbed trailers, and similar items. Even inventory can be considered an asset.

Some companies use real estate as collateral. This may be the main business property, a warehouse, investment property, or another piece of real estate.

What Type of Assets Do You Have to Use as Collateral?

A common misconception is that you must use business assets that you already own as collateral for loans. You can do this if you want, but it’s not the only option.

Some types of working capital loans use assets in this way. For example, construction businesses may apply for a working capital loan using a bulldozer or backhoe as security for the loan. This gives the lender a guarantee for loan repayment, which makes it easier to qualify.

On the other hand, other loan options let you use the item you want to purchase as collateral for the loan. Equipment financing follows this model. If you can’t pay the loan, you lose the equipment, but not your business assets.

Real estate businesses often use asset-based lending to purchase new properties and remodel them. The loan is based on the new property. After making a sale, the profits let the real estate business pay off the funding without problems.

What Companies Use Asset-Based Lending?

Many businesses use ABL financing to get over short-term financial hurdles. For example, a manufacturer may use this option to get capital to purchase raw materials. With the profits from the sold goods afterward, it’s relatively simple to pay back the funds. In other words, asset-based loans are useful for solving cash flow problems, especially if the business has urgent needs.