For many companies, obtaining credit through conventional cash flow lending arrangements can be difficult. They may be having operational problems, undergoing rapid growth, dealing with an acquisition, or their borrowing needs might reflect their cyclical or seasonal industries.
For those companies, asset-based lending provides an alternative to the traditional lending model. Asset-based lending groups specialize in providing secured financing to customers with limited access to capital.
“Asset-based lending provides a simplistic structure,” says Doug Winget, senior vice president, head of asset-based lending and floorplan lending at FirstMerit Bank. “Typically, asset-based lending has fewer covenants than a cash flow structure and more availability from the assets. It also may not need a personal guarantee from the owner.”
Smart Business spoke with Winget about how asset-based lending can provide financing help to those who need it.
What is asset-based lending?
Asset-based lending is senior secured lending that allows the borrower to leverage their receivables, inventory, equipment and real estate. Advances are based upon eligible collateral, with formulas against receivables, inventory, equipment and real estate. The working capital line of credit is financed against eligible receivables and inventory.
What types of situations are best suited for this type of lending?
Companies that have sufficient receivables and inventory can leverage their working capital and get higher advance rates. They can use this for working capital financing, seasonal working capital borrowing needs, leveraged recaps, mergers and acquisition financing, and turnaround financing.
How can an organization determine if asset-based lending is the right choice?
If the company is looking for more availability from its working capital, that profile fits asset-based lending. ABL advance rates will be higher against accounts receivable and inventory, which provides more availability than a traditional middle-market cash flow structure. Companies that have a strong EBITDA and an earnings profile relative to working capital will likely have more availability from a cash flow product, but companies that are more asset-intensive will benefit from an asset-based structure.
