Published by Christina Hester Snyder, Associate Partner and Wealth Advisor
If you’re like many of our clients, you may own a business that experienced cash-flow disruptions during the COVID-19 pandemic. The economic shutdown was tough on a lot of small businesses, especially those that are asset-rich and cash-flow poor. If you found yourself in need of business financing but worried about whether your business would qualify for traditional cash-flow loans, you are not alone. Many of our clients experienced this issue and found that asset-based lending could be the solution. In this guide, we will explore the ins and outs of asset-based lending so you can feel confident in your financing decisions.
What Is Asset-Based Lending?
Asset-based lending (ABL) is a type of financing issued to businesses in which the loan or line of credit is backed by some form of collateral. Usually ABL loans are secured by big-ticket items like inventory or equipment, but things like accounts receivable and other assets can also be used. Loans can be secured by a combination of assets as well.
When Is ABL Used?
ABL is different from traditional business financing, which focuses on the strength and stability of a company’s cash flow, and it is most often used when a business needs funding right away, either to meet short-term cash-flow needs or in order to expand. Such businesses usually have their funds tied up in inventory and equipment, or are unable to secure a loan through traditional lenders like banks.
Here are some pros and cons to think about if you are considering an asset-based loan for your business:
- Easier to obtain. ABL loans are easier to obtain since you are providing collateral as proof that you will repay the loan. Because of this, lenders are willing to work with businesses who maybe aren’t the most creditworthy by traditional measurements.
- Utilizes fixed assets. A big benefit to ABL financing is that it puts fixed assets to good use. Assets that have already been paid for and might not be part of the day-to-day operations of the business can be leveraged to obtain additional capital. In turn, those funds can be used to improve or expand upon the business.
- Provides flexibility. ABL loans also provide flexibility because there are very few limitations on what the loan can be used for, as long as it is used for a legitimate business purpose. There are also less ongoing requirements than traditional cash-flow lending, meaning you won’t have to worry about debt service coverage and leverage levels. Additionally, since this type of loan is tied to the value of your assets, your borrowing potential increases as the value of your collateral grows.
- Restrictions apply. Though there are not many restrictions on how the funds can be used, there are restrictions on the type of collateral that can be used to secure the loan. For instance, many lenders require that the asset be high in value, with either a low depreciation rate or a high appreciation rate, and it must be easily converted to cash. This can make obtaining an ABL loan more difficult for small businesses. ABLs also require ongoing reports on the status of the assets used as collateral.
- Higher risk. ABL loans are also riskier than other loans because of the fact that they are secured with business assets. Like a mortgage, you give up rights to your collateral if you cannot meet the repayment terms of the loan. This means that if you do not pay back the loan, the lender can seize your assets. This can have devastating consequences for the business if the loan was secured with a critical piece of inventory or equipment.
- Higher cost. Lastly, ABL loans have higher costs than other forms of traditional financing due to the up-front fees associated with using assets as collateral. These costs include collateral assessment, field examination, inventory appraisal, and monitoring fees and they can add up pretty quickly.
How ABL May Be Able to Help Your Business
Many different industries can benefit from ABL financing, including new restaurants, retailers, distributors, and wholesalers. Most businesses that are asset-rich but struggle in consistent cash flow could be candidates for asset-based lending. Depending on your specific situation, ABL loan formulas may even provide access to more capital than the traditional cash-flow lending formulas provide.
Is ABL Right for You?
If you own an asset-rich business and would like to explore your borrowing options, we would love to hear from you. At Jacob William Advisory, we can help you work towards makin the right decision when it comes to business financing, ensuring that you won’t leave any money on the table. Contact our office by calling 410-821-6724 or emailing [email protected], or schedule an appointment at https://www.jacobwilliam.com/insights/#contact.
About Christina Hester Snyder
Christina is an Associate Partner and Wealth Advisor at Jacob William Advisory with a storied 20-plus year career in financial services. Christina is known for her commitment to her clients and is dedicated to helping them alleviate their financial fears through education and planning that goes far beyond investments. She believes in a comprehensive approach that addresses all facets of planning, including wealth transfer, insurance, taxes, investments, estate and trust planning, retirement, risk management, and business planning. Christina graduated from the University of Baltimore with a Bachelor of Science in Business with an emphasis in international business. She also holds many professional designations, including CERTIFIED FINANCIAL PLANNER™, Chartered Financial Consultant® (ChFC®), Retirement Income Certified Professional® (RIPC®), and Certified IRA Services Professional (CISP). She is an active member of her community and is involved in many professional and nonprofit groups, including acting as the president of the Maryland chapter of Women in Insurance & Financial Services and serving on the board of a nonprofit that helps Maryland families with financial hardships. To learn more about Christina, please click here.