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ABL, An Effective Strategy for Banks to Mitigate Risk

rdanis, 9 months ago
7 min read

Asset-based lending, ABL, has become a flexible financing option among businesses. However, it is not only beneficial for borrowers but also for banks. By offering asset-based lending programs, banks can tap into a lucrative market, diversify their portfolios, mitigate risk, and foster long-term client relationships. One of the primary benefits of offering ABL programs is the potential for increased revenue generation. Financial institutions earn interest by lending against tangible assets such as accounts receivable, inventory, equipment, or real estate. Unlike traditional forms of lending, asset-based lending allows higher loan-to-value ratios, which means banks can lend more money than the collateral’s appraised value, resulting in higher interest earnings for the financial institution.

Along with greater earnings, a second and vital benefit is the ability to monitor the collateral securing the loan. Traditional loans, such as mortgages, auto loans, and commercial real estate, can fluctuate in value and quality. However, ABL funds off inventory, accounts receivable, and equipment, which is reconciled monthly, ensuring enough collateral to cover the loan. This allows for greater visibility and control over the borrower’s assets, providing a higher level of security for the Bank and mitigating the risk of fraud, mismanagement, or loss of assets.

As monthly reconciliation occurs, valuation and appraisal of collateral also take place. As the Bank receives collateral, it can appraise each request. Determining whether to fund it based on prior history, the strength of collateral, or other business rules, mitigates risk by ensuring the collateral has sufficient value to cover the loan amount. Banks may also update the valuation periodically to account for changes affecting the value of the collateral.

Asset-based lending also gives banks faster access to funds in case of default. Instead of going through lengthy legal processes to recover the loan, banks can liquidate the collateral quickly and recover a significant portion of the loan amount. This ability to promptly convert assets into cash reduces the Bank’s potential financial loss.

The advantages of offering ABL programs for banks are numerous. ABLSoft‘s clients have increased revenue generation, mitigated risk, diversified their loan portfolios, strengthened client relationships, and achieved a competitive advantage by providing the most advanced, intuitive SaaS-based platform on the market. Incorporating ABLSoft into your practice adds a layer of security and risk mitigation. This strategy allows them to lend to businesses with higher risk profiles or unique circumstances while protecting their interest.