The asset-based lending business has changed mightily over the past twenty years, with large commercial banks jumping at quality lending opportunities that once were considered suitable only for "lenders of last resort."

Just as banks and independent lenders are discovering the appeal of ABL deals, increasing numbers of borrowing companies are finding that the benefits can outweigh the perceived disadvantages of greater scrutiny, more frequent reporting requirements and higher interest rates. Happily, it is no longer shameful for a company to find itself ineligible for traditional bank loans, and the ABL world has been flooded with attractive
lenders and borrowers alike. No value judgment is implied when a banker steers a company to its asset-based lending department; indeed, these loans, if structured correctly, can become among the safest and most profitable product lines for lenders--- whether banks or independent, non-bank financial institutions. And for small and growing businesses, they are a viable alternative to traditional bank financing, offering more individualized attention and greater flexibility. Now, just because a company has higher leverage or narrower profit margins than most traditional lenders are comfortable with, borrowers are not prevented from securing the financing they need.

Flexibility alone is reason enough for some companies to seek asset-based loans; for others, it’s simply because their credit standing does not conform to traditional banking guidelines. Believe it or not, you might find yours among the businesses that actually prefer to pay higher interest rates in return for the creativity, discipline, service and attention that the ABL lender can provide. Often, the aim of the asset-based lender is to use debt to help a company manage through periods of growth or turnaround, with the ultimate goal of assisting the borrower in graduating to more traditional loans to fund working-capital or equipment finance needs.

For those of you out there who have not chosen to wade into the ABL waters, let’s begin with a definition: asset-based lenders are those that lend funds secured by a pledge of the borrower’s accounts receivable and inventory, with an established advance percentage for each class of collateral. In the purest sense, ABL lenders focus on the liquidation value of the borrower’s assets as the basis for making a loan. ABL is not cash-flow lending---that’s for the traditional banks, even when those banks require a pledge of the borrower’s assets just for good measure. For example, when the level of receivables fluctuates, credit availability moves in lockstep. So the funding available handily mirrors the borrower’s working capital needs.

Slick.

Companies with fast or erratic growth, unusual seasonal fluctuations in sales, or volatile earnings represent the most likely ABL candidates. Similarly, those that require higher advance rates than are available from traditional lenders can often obtain what they need from an ABL lender. Companies that are chronically undercapitalized and find additional outside capital to be either unavailable or actually unwanted can also benefit from an asset-based loan. When time is of the essence, lenders are able to make quick decisions about whether/how much to lend, and they’re less fixated on current profitability, looking instead to the borrower’s future growth prospects. Nothing comes without a price, however: in exchange for the higher risk and greater latitude in lending policies, borrowers pay a higher interest rate, sometimes several percentage points above prime, or what lenders publish as the "base rate."

Independent asset-based lenders have led the charge for the rest of the field, followed by traditional banks’ initiating their own ABL divisions. Alternatively, for banks that offer deep pockets but do not enjoy the level of personnel needed to manage asset-based loans, partnering arrangements with an outside ABL provider has been the answer. In addition to funding loans, bank ABL departments and independent ABL shops conduct all of the loan monitoring and handle all of the customer requests in this people-intensive business. The lender collects interest and regular collateral reports as well as month-end balance and collateral summaries.

Step by step, the process of securing an asset-based loan begins with a pre-loan collateral audit and other due-diligence activities that result in a credit decision. After the loan is approved, the lender prepares the appropriate documentation, followed by actual funding. Independent ABL lenders, because they have the ability to monitor
assets so carefully, can often advance a larger percentage against those assets, so a smaller company might be able to obtain a larger loan from an independent ABL lender than it could from a traditional commercial bank. Additionally, ABL lenders often find that healthy receivables and inventory, coupled with an excellent performance history, can pave the way for a mutually beneficial ABL scenario.

Asset-based loans usually range from $100,000 at the smaller level, with the transition to middle-market loans occurring at about the $1-$2 million-range. The smaller, more entrepreneurial lenders tend to offer more aggressive advance rates--- sometimes as much as 80-85% against accounts receivable---than bank ABL
departments. Some lenders will agree to advance only against accounts receivable, but most exhibit at least some flexibility.

From the borrower’s standpoint, ABL is not necessarily for the faint-of-heart. The business owner and/or operator must be very organized, and operate under an open-door policy to permit the lender frequent access to detailed financial information. You must know your company and your industry, because the lender will ask lots of questions. Finally, if you can identify your company as a suitable candidate for an asset-based loan, act sooner rather than later. ABL lenders cannot afford to position themselves as the Patron Saint of Desperate Causes; in order to survive, they must seek to establish relationships with viable, ongoing businesses.

Still a skeptic? Well, take a look at your receivables aging schedule, analyze your company’s inventory, root around for cash in your bank account---and try to convince me of a better way to obtain financing for your growing enterprise.