Having been in the business for 25 years, I can remember a time when an asset-based loan (ABL) was viewed as a financing option of last resort for struggling companies. But that’s not the case anymore. Today, ABLs have shed that reputation and provide a flexible financing option for healthy, asset-strong businesses of all sizes. They’ve become more mainstream, customized and sophisticated.
Lenders extend ABL financing based on not only the creditworthiness of the borrower and the strength of its balance sheet, but also on the quality of supporting collateral. Companies turn to asset-based loans to cover working capital needs or invest in company growth.
ABLs can be structured as revolving lines of credit, term loans or a combination of the two. Several types of collateral can be used to back the loans, including unrestricted cash, accounts receivable, inventory, machinery and equipment, real estate, and even intangible assets such as intellectual property.
ABL financing is formula-driven against these assets. For example, a company might have an ABL credit facility that allows it to borrow up to 60% of the value of its inventory and 85% of the value of its accounts receivable.
What makes an ABL appealing is its flexibility: The availability of financing grows and shrinks with the corresponding availability of a company’s assets. ABL financing can be customized to fit a company’s business cycle and is easily adjusted.
This trait is particularly attractive to companies in seasonal industries where sales, working capital requirements and cash flow can fluctuate substantially each quarter. For example, consider a snack food distributor that makes specialty items for the end-of-year holidays. Earlier in the year, the company needs capital to purchase inventory to get ready for the holiday season. To meet that need, the company can establish an asset-based seasonal line of credit.
A couple of other major advantages of ABL financing are:
Pricing often on par with traditional cash flow loans. Many people have the outdated belief that ABL loans are high priced. That used to be the case, back when ABL borrowers were riskier. But now that ABL lenders are serving healthier borrowers, the pricing for ABLs is similar to cash flow loans.
Fewer covenants than cash flow loans. An ABL is typically governed by only a couple covenant types, such as a fixed-charge coverage ratio covenant and/or a leverage ratio covenant, depending on the deal.
Borrowers transitioning to ABL financing must adapt to a couple of changes, neither of which are overly challenging.
The first change is meeting additional reporting requirements. ABL borrowers must provide more frequent collateral reporting, generally weekly, biweekly or monthly. At Hancock Whitney, we also require monthly financial statements.
The other change involves control over cash. An ABL lender will require cash dominion. As cash receipts are collected, the proceeds go directly to pay down the revolving loan balance. As the borrower requires cash to pay for goods and services or fund payroll, etc., it borrows against its line of credit.
A wide range of businesses use ABL financing. Nationwide, in 2024 the Retail & Supermarkets sector took out the largest volume of ABLs, at $23.4 billion. Wholesale and General Manufacturing followed with $23.3 billion and $16.8 billion, respectively. Other sectors representing more than 5% of ABL volume included Oil & Gas, Automotive and Business Services, according to LSEG Data & Analytics.
ABLs are an especially valuable funding source for middle-market businesses. While large corporations tend to have greater access to established capital market channels — including both traditional and institutional bank loans, junior capital, high-yield bonds and equity markets — their middle-market counterparts tend to have more limited options.
Regardless of your specific liquidity need, before you raise additional equity or seek to raise various expensive forms of junior capital, consider whether you are taking full advantage of your balance sheet. If you need more liquidity and flexibility and you can’t get it from a cash flow structure, an asset-based loan may very well be the answer.
To learn more, talk to one of our ABL specialists. Our team has extensive experience supporting the financing needs of companies across a range of industries.
Hancock Whitney Bank, Member FDIC.
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