Business Owner's Guide to Asset Based Lending

The business owner who is seeking financing has more options available than two decades ago.  An Asset Based Line of credit (ABL) is one.

 

Who's using it? 

Companies who are..

·         Early Stage (pre-bankable: less than 3 years in business)

·         Fast growing

·         Turned down or kicked out by their bank

·         Profitable but with working capital shortages by factors such as: taxes, death in the family, seasonal fluctuations in business, large orders, business acquisitions

·         Manufacturers, distributors, exporters, importers, business service

·         Recovering from setbacks

·         Public

·         Private

·         Reorganizing in Chapter 11 bankruptcy

Some companies you might have heard have that have successfully used the ABL finance technique are Soloflex and Otis Spunkelmeyer Cookies.

 

How it Works

On a day-to-day basis, the business borrows at a pre-defined advance rate against their receivables and inventory. Typical receivables advance rate ranges from 70-85%, depending on the quality of the receivables.  Inventory advance rates generally range from 30-60%, depending on the marketability of the inventory.

 

All receivable remittances (the collateral) are lockboxed to pay down the line, so the formula is maintained.

 

The account will be monitored by reports and field examinations.  Receivables will be assessed for bad debts, high credits and returns, which combined make up "dilution" of receivables.  If inventory is used as collateral, counts will be performed.  

 

Asset Based Line of Credit

Comparison to Conventional Line of Credit

 

 

	ABL	Conventional
Lowest Cost		X
No annual cleanup	X
Based on Collateral	X
Based on Historical Earnings		X
Deficit Net Worth acceptable	X
Past losses acceptable	X
High leverage acceptable	X
Monitoring	X
Dependable source of permanent working capital	X

 

Benefits

 

One of the most important benefits of an ABL is the long-term view lenders take. Most conventional banks insist on an annual "rest" or "clean-up" period. Many fast growing companies need their line constantly during the year.  Therefore, the company must play the old "roll the line" game, drawing on other credit sources to pay the line down: stretching supplies, pushing customers for early payment, deferring term loan payments, delaying normal expenses, and just generally "juggling" to make the bank happy. ABL lenders expect the company to have a permanent reliance on the working capital, and therefore don't ask for a paydown. The loan pays down naturally as profits are retained.  Additionally, most ABL lenders will renew lines so long as customers comply with monitoring controls.  The prevents the line being called when a company is coming off of a bad year.

 

Asset based lenders generally increase line amounts readily if collateral is there to support it.  This is good for fast growing companies that may be hamstrung by bank line caps that are slow to be increased.

 

Drawbacks

 

Marginal Expenses

                                              =Incremental Profit          =Incremental Profit

If Incremental Profit > Cost of debt, an ABL may make sense.

 

 

Sources

Many big banks offer ABLs, mostly catering to companies needing $5 million or more.  Small ABLs are available through a handful of boutique non-bank finance companies.  Most small banks don't because of its labor-intensive nature.  Banks seek the higher quality deals, working with highly levered companies, but not deficit net worth companies.  Non­regulated, non-bank lenders are more consistently active as players in the market and have more generous underwriting guidelines.

 

Conclusion

An Asset Based line of credit is specialty financing for businesses with a specific profile. In the correct situation, an ABL can provide a dependable, reliable source of working capital that can fund a company through troubled times as well as hyper-growth. Conventional financing rules can be thrown out the window when the underlying receivables and inventory are good.  If you think an ABL is right for you, contact Corporate Funding about finding the right lender for your company.

 

---