Is your working capital insufficient to support your growth or do you simply lack the liquidity to seize an interesting investment opportunity? If so, have you considered asset-based lending (ABL), aka asset-based financing?
This is a particular type of loan, based on the value of the assets you can offer as collateral. While this type of financing is much more flexible than a conventional loan and has gained in popularity in recent years, it is still underused and undervalued.
Asset-Based Financing Particularities
- Unlike a conventional (cash-flow based) loan,there is more lender control and monitoring. This enables better assessment of collateral value by the lender and can create potental for increased borrowing. In many cases, accounts receivable will be financed up to 90% of their book value and inventories may in some cases, depending on their nature, be financed up to 75%-80% rather than the traditional cap of 50%.
- As ABL relies heavily on the quality of assets offered as collateral, the lender will require comfort on the value of its collateral before granting financing, and periodically thereafter. This comfort is generally obtained through accounting reviews and full inventory valuations.
- In the majority of cases, debt coverage is the only monitored financial ratio.
Given its particularities, asset-based financing can be a preferred tool to help a company in financial difficulty to emerge from restructuring and even prevent it..
- Prevention: As already mentioned, ABL can fill a working capital gap and allow a company that has already demonstrated early signs of insolvency to quickly obtain financing and implement corrective measures.
- Correction: An insolvent business is generally unable obtain a traditional loan. In combination with a credible and well-developed recovery plan, ABL financing can be part of a possible solution to execute that plan.
Whether to finance the purchase of goods needed for the production of a large order or meet a specific need, ABL is an interesting solution for a company that has already reached its “reasonable” debt limit but needs to use the leverage of ABL to achieve its objectives.
Although being an interesting tool with many advantages, asset-based financing can be more expensive than a traditional loan (accounting review, valuation, financial and other fees, just to name a few). Before transitioning to ABL, you should carefully analyze all terms and conditions of the loan and consult a business finance advisor to evaluate the various solutions that may be available to you.
Do not hesitate to contact one of our advisors if you have any questions about Asset-Based Lending.