Perfomrance: Asset-based lending

With financial markets in turmoil, businesses may be having difficulty finding the financing they need. This is especially true for the under-performing, or over-leveraged business.

As a result, some companies will find themselves in need of an asset-based lender as opposed to a traditional banking relationship. Mike Colloton with First Business Capital Corporation, a subsidiary of First Business Bank, offered to educate us regarding the role of an asset-based lender in financing today’s businesses. 

According to Mike…

An asset-based lender (ABL) provides senior secured financing based on a company’s accounts receivable, inventory, equipment and real estate (the assets). So far, that sounds a lot like traditional bank financing. But the difference is that the ABL carefully structures the loan up front to tightly match the value of the assets. The ABL then monitors these values very closely during the relationship. ABLs are willing to finance businesses that have high leverage and/or uneven cash flow, while traditional bank financing is often structured around the assets, their real focus is on the company’s cash flow and net worth.

Asset based lenders are typically Plan B

A business uses an asset based lender when it cannot get the traditional bank financing it needs. Here are some examples of businesses that will turn to an asset based lender:

  • Turn-around situations
  • Change in ownership (leveraged buy-outs)
  • Bankruptcy
  • Rapid growth companies (leverage tends to creep up during rapid growth)

Every ABL has its own criteria for approval. Some ABLs are looking for companies that are relatively strong, but are going through a short-term blip when they can’t get traditional bank financing. Those ABLs will have interest rates only slightly higher than traditional bank financing. Other ABLs will do the very tough deals – but at a higher price.

Will an asset based lender finance anyone?

No. Typically ABLs are looking for companies with good, strong, business-to-business accounts receivable (AR) that can be easily collected with minimal risk of nonpayment. For this reason, most ABLs will not lend on AR from contractors as they normally bill as the job is being completed (progress billings). Other businesses that don’t fit well for ABLs are retail, construction companies and hospitals.

The ideal client profile

The typical ABL client would be a manufacturer, distributor or service business. This is a business that has enough assets (for collateral) that the ABL can lend them the money they need to run the business properly. The typical ABL client also has one current issue (or hiccup) such as weak performance, high leverage, rapid growth, etc. that is preventing them from getting the financing they need from a traditional bank.

ABLs help small business…

Asset-based lending is not for every company, but they do help many businesses by getting them through their current uncomfortable situation and back to traditional bank financing. The period of time a business may be with an asset based lender may be as little as six months to as long as a few years. The goal and role of the asset based lender is to help businesses make it through the tough phase in their company’s lifecycle.

If your business is struggling to find the financing it needs, consider talking with an asset-based lender. Most are very experienced lenders that are accustomed to dealing with companies in difficult situations, and with very tight timelines. Yes, the cost may be a bit higher than traditional bank financing, but it will be money well spent to have a partner that wants you as a client, and is willing to work with you through challenging times

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