Alternative Access to Capital: Understanding Asset-Based Lending
What is asset based lending (ABL)?
The pandemic has created challenges and economic shifts for business owners. Many have experienced cash flow disruption, supply chain interruption, government mandated closures, and in some cases, a mass exodus of top talent. While the government has stepped in and provided some aid, many businesses are still desperate for access to capital.
Q: How did you get started in the Asset-Based Lending world?
A: After spending more than 10 years in the banking industry, I saw firsthand how the Great Recession led to the demise of many financial institutions. Many business owners were directly impacted financially. Availability of loans and lines were reduced, government regulations steadily increased, in some cases to an egregious level. As a result, financial institutions were forced to change their lending practices and parameters to an exhaustive level of scrutiny. I started looking for alternative solutions for my clients through networking with capital providers in the asset-based lending world. I also became familiar with private lenders, restructuring firms, and advisory practitioners like Harney Partners so I could offer better solutions for my clients.
Q: What is the difference between Asset Based Lending vs. Factoring?
A: Asset-Based Loans (ABLs) are collateralized loans or lines secured by a business’ assets inclusive of receivables, inventory, equipment, and sometimes, real estate. Many institutions, including private capital providers and banks, extend ABL solutions. Oftentimes, conditions called covenants are tied to the extension of the loan to prevent the borrower from defaulting. Regulated institutions, including traditional banks, also extend ABLs. However, they may enforce a more stringent due diligence processes coupled with extensive financial performance requirements to maintain the loan.
A private lender, such as Republic Business Credit, remains less concerned about financial covenants and alternatively focuses on the borrower’s collateral to construct a facility that meets the prospects needs. An ABL facility can also be flexible so when the borrower requires increases, advances on unbilled receivables, or seasonal over-advances, asset-based lenders can make quick decisions and are not held to regulatory requirements that hinder a borrower’s ability to grow or make swift changes.
Conversely, factoring is the advance of cash collateralizing accounts receivable. Factoring is recognized as a simple solution for clients that may not have additional assets such as inventory to collateralize. Oftentimes, invoices are factored to assist in paying suppliers, employees, and even to support a client’s growth. The factoring advance rate is generally up to 90% of eligible receivables, and depending on the lender, may not require covenants or personal guarantees.
Q: Who is a good candidate for Asset-Based Lending?
A: Most businesses in B2B industries with asset rich balance sheets who may experience variations in cash flow are great candidates for ABLs – especially those experiencing high growth, a business disruption, or are in start-up phase and need a capital solution to kick-start the business. Additionally, ABLs are an alternative to taking on additional equity, raising capital, or investing personal cash. And – if you are in a business or industry that a traditional bank deems to be risky, an ABL loan may be a great solution for you.
Q: What are some of the recent challenges you have experienced in the ABL space?
A: The pandemic created many economic shifts and challenges for most business owners. Many experienced cash flow disruption, supply chain interruption, government mandated closures, and in some cases, a mass exodus of top talent. Even though the government stepped in and provided aid through PPP and EIDL, many businesses are still struggling. The bank protection programs that assisted in the recovery of thousands of businesses also created a deficiency in the number debt restructuring opportunities. Many economists predict that the government programs will not sustain businesses and that challenges including inflation and workforce disruption will continue to be an issue.
Q: What is an example of how an ABL structure could help a business?
A: ABL firms often partner with restructuring firms, investment banks, private equity, and financial institutions to assist in restructuring debt. For example, during economic downturns, and when a company is forced to file bankruptcy, debtor-in-possession (DIP) financing may be a solution to help a business recapitalize debt by utilizing the assets of the company for working capital purposes. In this case, the ABL lender works with the business to construct a loan or line against the assets of the company. If there are enough valued assets, an ABL lender may step into a senior position and extend a loan against the assets. In many cases, they may also pay off an additional senior note secured by the bank or other institutions to take a senior position on the assets. This often takes place in DIP Chapter 11 bankruptcy filings.
Q: What tips would you give to someone seeking an ABL facility?
A: There are many ways to approach seeking a loan, structuring capital, and finding the right solutions for your business. Given my background as a banker, I always recommend finding a seasoned banker that is consultive in approach and is considered a center of influence. Bankers are oftentimes the ones who will introduce you to right people at the right time. Next, I would spend time ensuring you have solid financials. I have seen many companies, both small and large, seek capital and without having solid financials. Your financials help advisors understand the direction in which your company is going. It will assist with understanding the value of the business assets and the amount of cash accessible to the company.
About the author:
Candice Hubert is Senior Vice President for the Texas market at Republic Business Credit. Based in the Houston office, she joined the Republic team in 2012 and focuses on delivering both asset-based and factoring solutions.