What is ABL? Your Top 7 Biggest FAQs, Answered Quickly

What is ABL? ABL loans, or asset-based loans, are one of the top tools in a real estate investor’s arsenal. They’re a great fit for investors who need faster-than-normal funding, can’t qualify for traditional funding, and want more term flexibility. Let’s walk through the basics of these loans below.

Main Takeaways

• Asset-based loans are loans secured primarily by using a borrower’s assets as collateral. This is different from traditional loans, where someone’s financial history is the biggest factor that decides their eligibility.
• Asset-based loans can benefit people who need easier eligibility, customizable terms, quick funding, and quick payoff timeframes.

Table of Contents

• What is ABL?
• How Does Asset-Based Finance Work?
• Who Might Benefit from an ABL Loan?
• How Much Money Do Asset-Based Finance Providers Give to Borrowers?
• How Can I Qualify for an ABL Loan?
• What is the Difference Between Asset-Based Finance vs. Traditional Finance?
• What are the Pros and Cons of an ABL Loan?

What is ABL?

The term “ABL loan” refers to asset-backed lending.

In essence, an ABL loan is a loan secured by assets as collateral. Such asset collateral often includes inventory, trade account receivables, equipment, mortgages, or fully owned properties. Asset-based loans, such as Baltimore hard money loans, aren’t meant for personal use. Instead, companies and investors use it, wielding their assets (like commercial real estate) as collateral for the loan.

How Does Asset-Based Finance Work?

Asset-based finance strategies can be easier to obtain than traditional lending. After all, asset-based lenders prioritize your collateral’s value, not your financial standing. Furthermore, if the borrower fails to repay the loans for whatever reason, the lender can fall back on the asset for financial security.

Due to this fundamental difference, asset-based loans are usually handled by private, local lenders, who can provide more flexible terms. In addition, since assets take less time to approve than a person’s finances, borrowers can get funded much faster, often within weeks.

On another note, an ABL loan can come in the form of term loans and lines of credit.

Who Might Benefit from an ABL Loan?

Considering all these factors, asset-based finance is especially popular with new businesses, cash-strapped businesses, or businesses with low credit scores.

Companies may use it for payroll, new projects, or other expenses. In particular, real estate investors often use it to pay for new real estate projects or purchases, like fix-and-flips, renovations, or buy-and-holds.

How Much Money Do Asset-Based Finance Providers Give to Borrowers?

Asset-based finance providers largely determine a borrower’s loan amount based on a percentage of the asset’s value. To find this percentage, they can calculate the borrower’s loan-to-value ratio (LTV), after-repair value (ARV), and other factors.

How Can I Qualify for an ABL Loan?  

While you should thoroughly investigate the ins and outs of ABL loan requirements before moving forward, they generally include having:

• A Target Property
• A decent (but not necessarily perfect) credit score
• Money prepared for a down payment
• Proof of income
• Real estate experience OR a meticulously laid-out plan for your project’s success

What is the Difference Between Asset-Based Finance vs. Traditional Finance?

The difference between asset-based finance and traditional finance is straightforward. When using asset-based loans, your eligibility is based on your asset’s value. On the other hand, with traditional finance, your eligibility is built upon your financial standing, both past and present.

What Are the Pros and Cons of an ABL Loan?

The pros of an ABL loan are numerous. They include:

Pros

You Access Easier Eligibility

Asset-based finance has fewer barriers to eligibility. It doesn’t have much of the baggage that comes with traditional loans, like high credit score requirements.

To be clear, the requirements most types of loans have still matter, like having a stable income, proven financial history, and debt-to-income ratio. Additionally, your credit score should be at least decent.

However, unlike traditional loans, you don’t have to be pitch-perfect in these areas. There’s more room for error, as what matters in the end is your asset’s value.

There’s Faster Funding

Since asset-based finance takes less time to be approved, you can access funding within a very short timeframe. This turnaround could be as quick as 48 hours for some lenders, like us. So, if the clock is ticking and you need to close a deal or jumpstart your project ASAP, asset-based loans might be your best bet.

They’re Quicker to Pay Off

Aside from being quicker to obtain, an asset-based loan can take far less time to pay off than traditional loans. Typically, loan periods can last a few months to a few years. This is a far cry from traditional loans, which can take decades to put behind you.

The Loans are Customizable

Since private, local lenders are most often the ones to offer asset-based lending, there’s less bureaucratic red tape to work through. In other words, you can cooperate directly with lenders to tailor terms toward your unique background, financials, and other aspects affecting your project.

On that note, with an asset-based loan, you’re not tied to just one use for them. For example, if you’re getting a real estate asset-based loan, you could use it for construction, refurnishing, or virtually any other business purpose you could think of. You could even use it as bridge financing to fill the gap between funding sources.

Cons

Then again, getting an ABL loan can come with some risks. Here are some to stay aware of:

You Risk Losing Your Asset if You’re Not Careful

If you do not plan carefully, you could find yourself in a situation where you don’t have the means to pay off your loan. If this happens, you could lose your assets. As such, you must have the means to offset any obstacles that might come your way during the loan repayment process.

Your Credit Could Be Impacted if You Can’t Repay the Loans

Furthermore, if you can’t pay off your loan, it will negatively impact your credit, both business and personal. So, like any other loan, committing to an ABL loan without any forethought or foresight can have ripple effects for years to come.

Some Loans Have Higher Fees

Because some assets, like real estate, aren’t as liquid, they can be riskier for lenders to take on. As such, the lender may need to offset their risk by asking for higher interest, property inspection, origination, and other miscellaneous fees.

Some Properties May Not Qualify

Personal residences and other non-business properties don’t qualify for asset-based loans. For business properties, too, different lenders may have different ideas of what would be suitable for them to take on or not. Overall, your property needs to have a high value now—or predicted high after-repair value later—to be considered as collateral.

Get Asset-Based Lending with MHML

All in all, if you need money quickly and without the burdens of traditional loan requirements, asset-based lending can be a great alternative. As long as you have somewhat decent credentials and a property asset to show for, you may be eligible for funding.

If you live in Maryland and need capital for your next investment venture, we’re here to help. Our team of professional hard money lenders is on standby to guide you throughout your hard money loan journey. We have years of experience managing countless hard money loan projects and are ready to share our expertise with you. Give us a call today and be one step closer to closing the deal on your multifamily home!