Automated Collections Lowers Bank Risk in Asset-Based Lending
Asset-based lending (ABL) involves any type of lending secured by an asset. ABL permits businesses to raise working capital secured against current and fixed assets. Our bank collections software helps to compliantly collect any debt owed the financial institution.
ABLs gained the reputation from many in the industry as gutter banking and as a lending vehicle to avoid. For the longest time, the stigma extended to companies that used it as well. It was for companies with bad credit, strapped for cash, and incapable of gaining funding from traditional sources.
The OCC says in guidance that “National banks may engage in ABL with no aggregate limitations, provided the volume and nature of the lending do not pose unwarranted risk to the bank’s financial condition.”
Asset based lending methods have also improved in lowering risk helped by the capability to automate debt collection process. That plus the all in, after risk, annualized returns are higher than most commercial lending, according to experts.
Cultivate a Market
Developed in the U.S. more than 30 years ago, Asset Based Lending creates the potential for a comprehensive loan means, covering receivables, work-in-progress, inventory, plant and machinery and property, and sometimes intellectual property as well.
Though many lending mediums tend to follow economic peaks and valleys, ABL can adapt to changes in the marketplace, whether resulting from economic conditions, new legislation, or the emergence of new industries.
A number of financial institutions already recognize the potential since the ABL market is growing. According to Commercial Finance Association, the total ABL credit line commitments at the end of 2014 were nearly $216 billion, a 6.8% increase over 2013. In addition, the asset-based loans outstanding were almost $90 billion at the end of 2014, 12.3% higher than 2013.
In fact, some financial institutions believe that ABL is not only a market that they can cultivate, but something they can develop into their own brand.
Deploying best of breed collection automation software organizes flows improves debtor records gathering.
Factoring as Part of Asset Based Lending
Small businesses don’t always have a lot of assets to collateralize their loans. There are also a lot of mid-size or larger business that are intellectual property firms, such as marketing companies and consulting firms, who also don’t have a piece of real estate or tractor to put up. So there is a need to find more creative financing, such as asset based lending, that could serve that area.
Obtaining initial funding with factoring, a subset of ABL, usually takes a week or two. Securing venture capital funding can take up to six months, and the business owner must be willing to share ownership and profits with venture capital partners who will eternally have a say in how they run a business.
With factoring of receivables the lender mitigates its risk and as a result ownership dilution and buyouts are not an issue.
When you look at the receivable and inventory factoring usually there is a shorter time-frame involved, typically less than a year. When annualized, they produce enticing returns. Even with losses financial institutions can make a decent return.
We’ve come a long way on receivable backed lending for sure. There are added costs to managing these loans, but production costs are falling due to good third party support systems such as dynamic software and built-in compliance rules offered by IBS.
We have systems out there that will manage the process and help you underwrite. Our Online Self-Guided User Training Modules provides interactive training at no additional cost to support IBS clients, allowing platform users to take the online classes based on their availability.
Improved debt collection data retention ensures regulatory observance through the IT infrastructure.