In the market for asset-based lending?
Many companies experiencing financial stress may suddenly find themselves in the market for an Asset Based Lending product (ABL). Most commonly, an ABL product is being entertained because cash flow has gotten tight, the terms of an existing bank relationship have been violated, or the existing Bank is not willing to extend their relationship beyond its current commitment.
ABL refers to a type of financing where a company uses its assets as collateral to secure a loan. The assets commonly used in ABL include accounts receivable, inventory, machinery, equipment, and real estate. The lender will provide a revolving line of credit or a term loan, with the amount of the loan being determined by the value of the assets being used as collateral.
Most small to mid-sized businesses have little or no experience with an ABL product. This type of financing, like most, has both benefits and drawbacks.
Asset based lending, when leveraged correctly, can be an excellent tool for small to mid-sized businesses that: have past financial struggles; no longer qualify for bank financing; are experiencing rapid growth; have financing needs beyond the capability of a traditional bank; or do not want to dilute/further dilute ownership.
One of the primary benefits of ABL is that it allows companies to finance their operations even if they have a poor credit history or cash flow problems. As long as the assets being used as collateral have value, the lender will be willing to extend the loan.
Another advantage of ABL is that it provides companies with greater flexibility in terms of how they use the funds. Unlike traditional lending methods that require companies to provide detailed business plans and forecasts, ABL allows businesses to use the funds for any need they have. This means that companies can use the funds to purchase new equipment, expand their operations, or pay off outstanding debts.
Special attention needs be paid to all details of not only the loan structure/terms, but also with the details associated with the information the company will provide as part of its request for financing.
The interest rates on ABLs tend to be higher than traditional loans. This is because lenders need to compensate for the risk they are taking by lending money against assets that may lose value over time.
ABLs can be more complex and time-consuming than traditional lending. This is because the lender will need to conduct a thorough assessment of the value of the assets being used as collateral. This may involve hiring an appraiser to provide an accurate valuation of the assets.
It is important to realize and recognize that financial distress doesn’t developed overnight. It is important for companies to be more proactive than reactive when problems are looming. Here at the SEWN program, we have plenty of experience with these situations and can help get your company on track with a proper strategy. Give us a call today to have a brief chat about your current company standing.