Growing your Business in Tough Times with Asset Based Lending
Since the economic downturn in 2008, hundreds of New England businesses have had to batten down the hatches, lay off employees and adapt to the “new reality” in order to survive. Financing options began to disappear, lines of credit were lowered or even denied and paying bills and making payroll suddenly became a monthly shell game.
What is Asset Based Lending?
Business borrowers began to look for other types of financing that would give them the capital and liquidity to not only survive the downturn but grow as well. Some were lucky to find Asset Based Financing and an experienced lender like Webster Business Credit. Asset based financing allows businesses to borrow against themselves, their own assets, like accounts receivable, inventory, fixed assets and sometimes real estate. Because all of these are put together in one facility, it gives the business a line of credit that makes sense. It focuses solely on the companies assets which allows the lender to provide higher advance rates than a traditional bank. This additional liquidity gives companies the opportunity to have more available capital to take advantage of buying credit, better purchasing deals or even acquisitions for growth.
Traditional Bank Lending vs. Asset-Based Lending
The biggest difference between the two types of commercial lenders is what the lender is using to collateralize and secure the loan. The traditional bank lender uses cash flow as the primary repayment source with numerous financial covenants. An asset based lender looks at the collateral as the primary repayment source. For asset heavy companies, this type of financing will typically make more funds available because it is not based on cash flow. Higher advance rates and fewer financial covenants free up cash, providing more flexibility and liquidity.
Industries That Are ABL Candidates
ABL, or Asset Based Lending, has been around prior to the 1970’s and has been a mainstay of financing for businesses with heavy accounts receivable like staffing companies or heavy inventory like manufacturing firms. Some lenders go one step further and have specialty units that deal with a specific industry.
Some of the industries that are traditional ABL borrowers include:
- Wholesale & Distribution
- Service Industries
- Retail Electronics
- Retail Apparel
- Retail Department Stores
- Retail Sporting Goods
- Food Manufacturing & Distribution
How Can ABL Financing Be Used?
Asset based financing is being used by companies in a variety of ways to help fund their business needs and growth.
- Working Capital Financing
- Import / Export Financing
- ESOP or Employee Stock Ownership Plan
- Retail Financing
- DIP or Debtor in Possession financing
- Term Loan financing
- Emergence financing
- Acquisition financing
What to Look for in an Asset Based Lender?
Experience – Look for a lender who has been in the asset based lending business for at least ten years. Many banks and lending institutions have dabbled in ABL lending only to give it up a few years later. Make sure your lender is going to be there for the long haul.
Management – Make sure your lender has a stable and accessible management team at the top. If you are going to put your company’s assets up as collateral, make sure you know your partner in this plan. Ideally, you want to see a management team that has been together for a lengthy period; this shows consistency in the company.
Portfolio – Ask the lender how many companies like yours are in their portfolio. As a borrower you want to know that your lender has some experience dealing with similar matters. The ups and downs of today’s economy make running a company very difficult. You want a lender who not only recognizes your struggles but will work with you very step of the way to resolve them.
Asset based financing has come a long way and is now a mainstay in commercial lending. For asset rich companies, this may be the ideal way to free up cash. But remember, you are making a commitment with your lender. Rates, terms and covenants are all negotiable but experience, management and knowledge are worth far more in the long term. Good luck!