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.
In the midst of this maelstrom, savvy business owners and entrepreneurs began seeking alternative financing options that could provide the capital and liquidity they needed to not only survive, but thrive. As a result, many turned to asset-based lending (ABL).
ABL allows businesses to borrow against their own assets, such as accounts receivable, inventory, fixed assets and, in some cases, real estate. These assets are combined into one facility, forming one line of credit that can provide a company with capital that can be used for buying credit, to make better purchasing deals and even to make acquisitions for growth. Because asset-based financing focuses solely on the borrowing company’s assets, the lender can provide higher advance rates than a traditional bank.
ABL is not a new concept; it has existed for more than 40 years. Companies can use ABL in myriad ways to help fund their business needs and growth. Asset-based financing can be used for working capital, to fund an employee stock ownership plan (ESOP), retail financing, for debtor in possession (DIP) financing, term loan financing or to finance an acquisition.
Should you decide to pursue ABL for your business, you’ll need to know what to look for in a lender. Many national and regional banks have ABL subsidiaries. While there is no “one-stop-shopping” website to research possible lenders, a simple Internet search using the term “asset-based lending resources” will bring up a lot of leads.
Experience Is Key
What are some of the key things to look for in an asset-based lender? First and foremost, experience. Seek out a lender who has been in the asset-based lending business for at least 10 years. Many banks and lending institutions dabble in asset-based lending, only to give it up a few years later. Choose a lender who has already proved it is in it for the long haul.
Make sure your lender is led by a stable and accessible senior management team. Accepting asset-based financing means putting your company’s assets up as collateral, so it is essential to know your partner in this plan. Ideally, you’ll want a management team that has been together for a long time.
Industry-specific expertise is also a big plus. Ask the lender how many companies like yours are in their portfolio. The ups and downs of today’s economy are very challenging, and it can be very beneficial to work with a lender who recognizes your struggles and can assist you every step of the way. When you begin researching lenders, you will sfind that some have specialty units that deal specifically with your industry.
Asset-based lending has come a long way since the 1970s and is now a mainstay in commercial lending. The biggest difference between ABL and traditional commercial financing is what the lender uses to collateralize and secure the loan. While a traditional commercial 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.
Asset-heavy companies will typically be able to obtain more available funds through ABL because the collateralized assets have a higher value than the cash flow. Higher advance rates and fewer financial covenants free up cash, providing more flexibility and liquidity. For asset-rich companies, ABL may be the ideal way to free up cash. When it comes to choosing a lender, rates, terms and covenants are all negotiable, but experience, management and knowledge are worth far more in the long term.
