Financing
Asset-Based Lending
Companies, not finding a friendly welcome at traditional low-risk lending sources, often turn to asset-based lenders (ABL) for a warmer reception. This may be because their cash flow is being squeezed or their financial performance and /or leverage ratios may have gotten out of line. In these situations the company might find financing through an ABL more attractive.
While low-risk lenders protect themselves with covenants such as debt-to-equity or debt-to-cash-flow ratios, ABLs offer alternatives for those companies who do not fit well within the low-risk loan criteria.
A key advantage of ABL loans is that they impose fewer covenants but rely primarily on the assets pledged as security. ABLs protect themselves by closely monitoring the value of their collateral. Relatively extensive reporting is normally required to ensure adequate asset coverage is maintained at all times. If a company has the adequate IT systems as is the case with most mid-sized and large firms, the requisite reports are generally easy to publish.
Because ABLs work so closely with a companys daily operations, they come to better understand their business model and industry sector. That is why they will often extend extra financing and stay the course during more difficult economic times.
While asset-based loans are more intrusive, for many companies, interest charges and administrative fees are only slightly more costly than bank loans. ABLs impose minimal covenants compared to the unsecured, cash-flow-based loans of banks. Their higher costs are often offset by higher leverage.
In more difficult times, financially managing a company is often a juggling exercise balancing cash inflows with expenses. As such, it is not surprising that companies are turning more often to ABLs.