Asset based financing is a way for rapidly growing, cash strapped companies to meet their short-term needs.  In general, companies can tap into their assets to generate the cash flow through asset based loans.  ABL has become a popular choice for companies that lack the credit rating, track record, time and/or ability to pursue more traditional capital sources.

What is an asset based loan (ABL)?  A commercial asset based loan provides businesses with immediate funds and ongoing cash flow based on a percentage of the value of your company’s assets such as commercial accounts receivable, inventory, business equipment, machinery and recurring revenue contracts.  Funds from asset based finance can be used for day-to-day operating expenses or as capital for restructuring, turnarounds, mergers, acquisitions and buy- outs.

How does asset based lending provide working capital?  The lender assigns your business a revolving line of credit based on a percentage of each of the qualifying asset classes.  You may draw on your line of credit or revolver whenever needed and pay back to increase availability for future use.  You only pay interest on the funds you have drawn down so overall, it’s less expensive than a term loan.

What type of companies use asset based revolvers?  Many different kinds of companies use revolvers.  They are particular among retailers, wholesalers, distributors and manufacturers because these type of companies (a) can benefit from a cost-effective source of working capital and (b) have specific types of current assets that can be pledged as security.

Range of Funds:  $250,000 to $1 million from small finance companies and financial institutions.  Larger lenders tend to specialize in financing amounts of $1 million and greater.

What is the principal advantage of using a revolver secured by accounts receivable and/or inventory?    The acceleration of cash flow to the borrower to support its working capital needs.  By using its current assets as collateral, a company is able to generate cash sooner than if it had to wait for inventory to be sold to become accounts receivable and accounts receivable to be paid in cash.  Cash is available as needed, and any cash not needed on a daily basis is used to pay down the line of credit.

What are the costs?  The costs vary from lender to lender.  Businesses should expect to pay interest rates of Prime plus 2-5%.  Some finance companies may quote variable interest rates based on Libor rather than the Prime rate.  In addition, most will charge a minimum monthly administrative fee which can range from .20%-1.50% even if the business doesn’t draw on the line of credit.  Most loan costs include a non refundable due diligent fee once you sign the proposal or term sheet and if a field exam or audit needs to be completed, these can range from $750 on up to $25,ooo.  At closing, businesses should expect to pay a 1-2% fee on the credit line facility amount.

Generally, business owners will have to provide a personal financial statement and personal guarantees in addition to pledging the assets of the company.  The borrowing agreement will usually renew annually.  The loan agreement will contain loan covenants that must be understood and reviewed on a regular basis and followed by the borrower.  It is very important that these will be obtainable or there could be additional loan fees for being out of formula or covenant compliance fees.