For Businesses With Higher Leverage, Erratic Earnings, or Marginal Cash Flow.
Asset Based Lending (ABL) is a specialized loan product that provides fully collateralized credit facilities to businesses that may have higher leverage, erratic earnings, or marginal cash flow.
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
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Provides necessary operating capital, eliminating the need to wait for collections on A/R.
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Provides funding for companies that experience cyclical or seasonal fluctuation in their business cycle.
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Allows for a greater access to capital to fund growth via financing the increases in A/R and Inventory.
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ABL structure usually involves less covenant restrictions, this is offset by more transparent reporting and monitoring occurring between borrower and lender.
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ABL facilities can be customized to the individual business needs or industry requirements, and allows the borrower more predictable cash flow.