Some types of lending make business owners nervous, mainly because they’re not familiar with how these funding options work. Term loans are the typical loan that everyone knows and loves, but there are times when your business needs something different.

Traditional funding isn’t flexible enough to deal with business emergencies, credit issues, or small business finances. If you can master asset-based lending, it can open up a world of possibilities for your company. This guide can clearly explain ABL financing and answer your most important questions.

How Does Asset-Based Lending Work?

ABL financing depends on using some type of business asset as collateral for the loan. This collateral helps to guarantee that you’re going to repay the funds, which makes lenders less nervous when dealing with small businesses or companies with credit issues.

What kind of assets are acceptable? Most ABL lenders can work with real estate, equipment, inventory and accounts receivables, or unpaid invoices. Manufacturers can also use raw materials, finished goods, or work in progress as loan security.

Asset-based lending provides short-term loans you need to pay back in about a year. It’s designed to give you a fast but temporary infusion of capital for business needs. The money provided is working capital, so you can use it however you want.

How Does ABL Financing Compare to Traditional Loans?

Many traditional loans also require collateral for approval, but they have strict credit score requirements. This has pros and cons. On the upside, if you have excellent credit, you can qualify for low interest rates. The downside is that few small business owners can actually qualify.

With ABL financing, the situation is exactly the opposite. An asset-based loan is easy to qualify for because the collateral is responsible for most of the risk. Companies that had serious credit issues in the past can still usually obtain ABL financing, and so can businesses that have cash flow problems. The money gets approved quickly, and you’re not limited to strict rules about how you have to spend the funds.

How Are Asset-Based Loans Used?

ABL financing gives you a shorter time for repayment. To use these loans correctly, you should have a good income or buy something that helps you make money quickly enough to pay off the loan. For example, buying inventory works well because as you sell the products, you bring in enough revenue to more than cover the cost of the loan.