ABL Lending Asset Finance Business Line Of Credit Solutions

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Understanding ABL Lending in Asset Based Financing

Introduction

ABL lending under an asset finance scenario is a solid replacement for your required business line of credit solution. Let's cut right to the chase, that’s often the best strategy in assessing a business decision around your company's assets and sales for growth capital purposes

More often than not you are either self-financing currently (that’s not a perfect growth strategy by the way) or your ability to secure the business credit you need simply is not happening with your current banking or financing partner.

The Advantages of Asset Based Loans

So let’s look at what’s required to bring you the full advantages of secured loans via an ABL facility, that term being the acronym for 'asset-based lending' for firms with sales and sufficient assets. The reason you are contemplating this type of business financing via asset based lenders is simple -

You want to maximize working capital borrowing power based on receivables, your inventory, and other potential assets that can actually be margined for temporary liquidity!

Think of unencumbered equipment as an example of physical assets that can be incorporated as part of an asset based line of credit with a real-world loan to value ratio on your business assets for the benefit of the company's cash flow.

Key Requirements for ABL Facilities

Let's examine some of the key requirements for this type of facility. That will allow you to determine your overall success in securing a facility that meets all your needs and comes at a cost that is commensurate with your situation. We mention the cost briefly here in the context of our subject because many firms experience varying degrees of cost of financing in an ABL lending facility for their new business line of credit.

That is because asset finance pricing is based on criteria such as the overall financial health of your company. However, don’t despair because ABL lending actually works even if your company is in bankruptcy proceedings because it always comes back to the same issue - if you have assets then an asset finance solution is possible!

Key Assets for Financing

So let’s get back to those requirements - they include receivables that are under 90 days, which typically are margined at 90% of their value. Next comes inventory, and here is where it can get tricky. Although your new ABL facility and business line of credit margin your inventory you must be able to demonstrate that the goods are saleable in some form - whether that be work in process, raw materials, or finished goods. Most companies usually have a combo of all three types.

The Expertise Behind ABL Financing

Asset finance often doubles your borrowing power under this type of business line of credit. That’s because the firms that offer it are experts in their business - typically, more often than not, they are not banks, but private boutique-type firms that specialize in business asset financing when compared ot unsecured loans offered by banks.

But, and here is the 'but' you need to demonstrate proper accounting and regular financial statements - i.e. on a monthly basis, and you should be able to provide accurate reporting on things such as aged receivables, perpetual inventory reporting, and, in some cases, an appraisal on your other business assets - since these are temporarily margined for liquidity.

Importance of Good Business Records

What we are simply saying of course is that in order to borrow in an ABL lending environment you have to have solid business records and demonstrate you are in control of your key assets. That quite frankly should be your goal whether or not you are borrowing at all, don’t you think?

Key Takeaways

ABL is a method of providing businesses with a line of credit based on the value of their tangible assets. This typically includes accounts receivable, inventory, and equipment. It differs from traditional lending, where creditworthiness may be based more on cash flow or credit history.

Key Assets Considered in ABL:

Receivables: These are amounts owed to the company by its customers. They're often margined at a significant percentage (e.g., 90%) of their value.

Inventory: Whether it's raw materials, work in progress, or finished goods, the salability and condition of the inventory play a crucial role in determining its value as collateral.

Equipment: Tangible equipment that's unencumbered (free from liens or other interests) can also be considered in ABL. Commercial real estate can be financed as a part of the facility or via a separate term loan.

ABL secured loans provide liquidity even when a company doesn't have a strong credit history or is going through challenging financial situations when the company has sufficient sales and assets. As long as there are tangible assets, there's potential for a line of credit. It's especially useful for businesses that might not qualify for traditional bank financing due to various reasons like restructuring or financial performance challenges around rapid growth.

Role of Asset Finance Firms:

These aren't typically traditional banks. More often, they're specialized boutique firms with deep expertise in valuing assets and understanding the risks associated with different industries. Their primary focus is on the health and quality of the assets being presented as collateral versus unsecured loans provided by banks and credit unions.

Importance of Good Business Records & Accounting

To benefit from ABL, businesses must have solid records around their financial performance.

This includes regular financial statements, detailed inventory reports, and aging schedules for receivables. Good record-keeping not only increases the confidence of the lender but can also enhance the borrowing potential of the business.

Conclusion

What makes ABL lending distinct from accounts receivable financing factoring

While both ABL lending and factoring involve leveraging accounts receivables, they operate differently. Factoring involves selling receivables to a third party at a discount, with the third party collecting the owed amounts directly from customers. In contrast, ABL lending uses receivables as collateral for a loan, but the company remains responsible for collecting its receivables.

Are there specific industries or sectors where ABL lending is particularly popular or beneficial?

ABL lending is versatile and can benefit a wide range of industries. However, it's especially popular in sectors with significant tangible assets such as manufacturing, wholesale, distribution, and retail. Industries with cyclical or seasonal business patterns also find ABL beneficial due to its flexibility.

How quickly can businesses typically access funds once an ABL facility is set up?

Once an ABL facility is established, businesses can often draw down funds relatively quickly, often within 24 to 48 hours. This is because the lending is primarily based on the assets' value, making the process faster than traditional loan approvals that consider various other financial metrics.

Are there any potential downsides or risks associated with ABL lending for businesses?

Like all financing solutions, ABL lending comes with potential risks. For businesses that choose asset based lending, there might be higher interest rates compared to traditional lending, especially if the perceived risk of the assets is high. Additionally, if a company can't repay the loan, the lender might take control of the collateralized assets.

How does the fluctuation in asset value, such as declining receivables or inventory values, impact an ABL credit line?

ABL credit lines can be directly impacted by the fluctuating value of assets. If eligible accounts receivable or inventory values decline, the borrowing base or the amount a company can borrow might decrease. as part of the revolving line.

Asset based lenders will often re-evaluate the asset values periodically, which means the available credit might adjust according to the current value of collateralized assets as part of the business loan solution.

' Canadian Business Financing With The Intelligent Use Of Experience '

Stan Prokop is the founder of 7 Park Avenue Financial and a recognized expert on Canadian Business Financing. Since 2004 Stan has helped hundreds of small, medium and large organizations achieve the financing they need to survive and grow. He has decades of credit and lending experience working for firms such as Hewlett Packard / Cable & Wireless / Ashland Oil

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