How Asset-Based Loans Work
These loans are based on the assets pledged as collateral and are structured to provide a flexible source of working capital by monetizing assets on the balance sheet. While troubled companies often rely on asset-based lending (ABL) to provide turnaround, recapitalization, and debtor-in-possession (DIP) financing, ABS is also used by healthy companies seeking greater flexibility in executing operating plans without tripping restrictive financial covenants. Asset-based loans are structured with advance rates being tied to a specific percentage of eligible collateral according to their respective asset classes.
For example, Account Receivable having a higher advance rate than Inventory. The repayment of asset-based loans happens as the assets convert to cash in the businesses typical “business life cycle.” Inventory gets sold, is turned into an Account Receivable, A/R is collected and paid back against the loan. The cycle repeats as the company continues to build inventory, generate A/R, and collect remittance from its customers.
Key Benefits to ABL
Provides necessary operating capital, eliminating the need to wait for collections on A/R.
Provides funding for companies that experience cyclical or seasonal fluctuation in their business cycle.
Allows for a greater access to capital to fund growth via financing the increases in A/R and Inventory.
ABL structure usually involves less covenant restrictions, this is offset by more transparent reporting and monitoring occurring between borrower and lender.
ABL facilities can be customized to the individual business needs or industry requirements, and allows the borrower more predictable cash flow.