Is ABL The Answer?

By Toby Dahm, Senior Vice President  

In 2009, when most forms of lending were greatly reduced, loan commitments by asset based lenders actually increased, putting a very mild dent in the credit crisis.  Why were asset based lenders willing to extend more loans when the rest of the lending community was hunkering down?  It has to do the focus of the industry.

Asset based lenders base their credit decision largely on the value of the assets (or collateral) that they are lending against, as well as the business outlook of their borrower.  These are different criteria than tradition lending, which emphasizes financial strength, liquidity and historical profitability.  It is this focus on the present and the near future that enabled asset based lenders to select viable candidates to back despite the deep recession and the adverse financial impact it had on most borrowers.

To many businesses, the choice to use asset based lending was made for them due to no other options being available.  Other companies, which had options ranging from issuing bonds to selling equity, chose an asset based loan due to advantages it provided.  The main advantage is that it provides borrowing availability at precisely the time it is needed the most.  As the level of assets grow when orders are received and fulfilled, asset based lending provides for real time advances against the growing asset base, thus minimizing the drain on cash flow caused by growth. 

Another advantage is the close working relationship between the asset based lender and the borrower.  The asset based lender is in very close communication with the borrower.  In turbulent and dynamic times, and asset based lender is at an advantage in responding to client needs that often arise suddenly, due to this close working relationship.

Asset based lending agreements are covenant light.  The documents contain many fewer financial and operational covenants that can trip up a borrower or limit their flexibility.

Lastly, asset based lending establishes a borrowing discipline that requires the borrower to utilize the loan properly.  It is a tool to fund growth and seize opportunities, however it forces borrowers to cut borrowing levels during times of decline.  Although this forced discipline is not fully appreciated at the time, the borrower will ultimately come to understand the advantage of having lower debt during lean economic times.  As we have seen played out recently in many painful bankruptcies and restructurings, carrying excessive debt loads is a huge competitive disadvantage.

These and other benefits of this form of lending are the reason that so many companies are looking at this style of lending as being the best fit to meet their borrowing needs.