12 Jun Factors That Influence Asset-Based Loan Rates for Businesses
Asset-based lending (ABL) is appealing when you have valuable collateral but might not qualify for traditional loans. Getting a competitive interest rate on your ABL is key to unlocking the wealth of your collateral, and it’s tied directly to your business and your assets.
Understand the factors that influence your rate from ABL lenders to prepare smarter, negotiate better, and choose a financing solution with the most benefits.
1. The Type and Quality of Your Collateral
One of the most influential factors in your ABL interest rate is the type of assets you’re putting up as collateral. Accounts receivable, inventory, equipment, or real estate are collateral options. The more liquid and reliable your assets are, the better your rate can be.
For instance, if you’re borrowing against accounts receivable from large, creditworthy customers, lenders view your collateral as low risk. In contrast, using highly specialized equipment with limited resale value might increase your rate because of the greater risk to the lender.
Consider how well-documented and organized your asset records are. Even high-value items may not earn you favorable rates if you’re sloppy with your asset tracking. ABL lenders want transparency and accurate reporting.
2. Your Business’s Financial Health
Even though your assets secure the loan, lenders still take a good look at your business’s overall financial condition. They’ll evaluate your cash flow, profitability, and historical performance to determine the stability of your business and the risk of your loan.
If you’re operating at a loss or your revenue fluctuates wildly, lenders may charge a premium interest rate for the added uncertainty. You can reduce your financing costs with up-to-date financial statements and a strong balance sheet.
3. Your Industry Risk Profile
Some industries are inherently riskier than others, and lenders adjust their rates accordingly. Lenders look at sectors where assets lose value, businesses struggle to generate cash, payments are regularly delayed, revenue is cyclical, or the industry is declining. Construction, hospitality, or emerging tech businesses are judged as more volatile than businesses in healthcare, logistics, or manufacturing.
If you are in a more volatile industry, highlight areas where you’ve stabilized your operations or diversified your income sources. Show how you have succeeded despite unpredictability to reduce the lender’s perceived risk and your ABL interest rate.
4. The Loan Structure and Terms
The structure of your loan also impacts your rate. Asset-based loans come in lines of credit or term loans. Short-term loans typically have higher interest rates than longer-term ones. Some lenders also impose minimum usage fees, monitoring fees, or field audit costs, all of which affect your total cost.
Additionally, the percentage of your asset’s value you are financing, called the loan-to-value (LTV) ratio, impacts your rate. If you ask for 90% financing on your assets, expect to pay more than if you ask for 60%. The more leverage you seek, the more risk the lender assumes, and the more you’ll pay in financing costs.
5. Lender Experience and Appetite for Risk
Not all lenders view risk the same way. Traditional banks tend to offer lower rates, but they require more documentation and stricter underwriting standards. Alternative or non-bank lenders may be more flexible and fund faster with higher rates.
Work with a lender experienced in your industry. They offer better terms, more payment flexibility, and a structure better suited to your needs. If your business focuses on machining solutions, a flexible lender for manufacturing firms understands the value of your CNC machine as an asset. They will offer a fairer risk assessment and interest rate than a general lender.
6. Loan Purpose and Repayment Confidence
Finally, your plan for the ABL can affect your rate. Lenders want to see the funds used in a way that enhances your ability to repay. An asset-based loan tied to an expansion plan, revenue-generating project, or inventory investment is attractive because it will support the growth of your business.
No matter the purpose of your loan, build a clear plan for your asset-based loan to secure a competitive interest rate. Show how the borrowed capital will grow your business, support your broader business goals, and generate a return comparable to repayment.
Secure Your Asset-Based Loan
Being better informed on the factors influencing your ABL interest rate strengthens your negotiating position. Control the factors you can, like strong financials, the quality of your assets, and a lender familiar with your industry, to maximize its financial benefits for your business.
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Asset-based lending (ABL) provides businesses with strong collateral an alternative financing option when traditional loans aren’t a good fit. Securing a competitive interest rate depends on several key factors. Explore six major influences on ABL rates in this infographic. 