Can ABL options fuel your business — and keep it running?

January 30, 2024

Borrowing against assets instead of using cash flow could infuse your organization with the capital it needs to grow, or meet ongoing capital needs.

Need capital without relying on the cash flow of your organization? Asset-based lending (ABL) has evolved into a tried-and-true solution for companies with strong working capital assets.

No longer considered “the loan of last resort,” an asset-based loan might be a key element to fund your expansion.

“Most commercial loans leverage cash flow, so they’re focused primarily on borrower performance in terms of how they structure their loans,” says Samuel Philbrick, president of Asset Based Finance at U.S. Bank.

“Conversely, on the ABL side, we’re looking at the company’s balance sheet, the assets that it owns and what those assets generate in terms of their collateral value. This value, which is often referred to as a borrowing base, is the basis for a borrower’s debt capacity under an ABL financing structure.” 

 

Cash-flow lending versus ABL

In traditional cash-flow-based lending, a borrower's financial performance is king. The amount of money you can get for a commercial loan is usually dependent upon earnings before interest, taxes, depreciation and amortization (EBITDA). Basically, the more cash your business generates, the more money you can borrow.

ABL, on the other hand, considers assets. Lenders typically advance funds based on a percentage of secured asset value — generally 85-90% of eligible receivables, for instance, and 50-75% of eligible inventory.

Businesses with thin or volatile EBITDA margins can turn to asset-based loans to fuel growth or improve cash flow.

In exchange for the willingness of a bank to loan on assets, ABL borrowers typically have monthly collateral reporting requirements. Interest rates in today’s market are very comparable between the ABL and a traditional commercial loan. This reflects the value that the lender places on the fully secured nature of the ABL.

 

The difference a recession makes

Despite the obvious appeal of predictable debt capacity and financial flexibility, ABL wasn’t always so inviting, according to Philbrick. “Back in the day, an asset-based loan was looked at as a lender solution, not a borrower solution,” he says. “It was a loan a company would take because it couldn’t get any other kind of loan.”

Attitudes toward ABL changed during the global financial crisis and subsequent recession. As requirements for conventional commercial loans tightened, borrowers needed alternative ways to finance growth and sustain operations. Banks responded with ABL products, offering newer and more favorable terms, such as fewer financial covenants. The ABL loan market has grown in popularity ever since.

To determine whether it can benefit from ABL, your organization should ask itself two primary questions, Philbrick says:
 

1. Does leveraging your assets provide greater borrowing capacity than leveraging your cash flow?

If your organization invests heavily in physical materials or merchandise, it might be a good candidate for an asset-based loan. Even if your organization has strong liquidity, when leveraging your asset values outstrips leveraging your cash flow, ABL can improve your borrowing position.

“Say a company’s EBITDA is $10 million,” Philbrick says. “The typical lender will lend three times that. But if that same company has lendable working-capital assets that generate a borrowing base of $40 million, then all of a sudden an asset-based loan will be more attractive based simply on debt capacity.”

Industries well positioned to exploit ABL opportunities can include retailers, distribution companies, food and beverage, and manufacturers, as well as commodities-based companies like building products, metals and mining, or oil and gas. “A key consideration is the strength and volatility of a company’s operating margins,” Philbrick says.
 

2. Do you need financial flexibility?

Organizations experiencing periodic market volatility and variability are good candidates for ABL, because they may need greater financial flexibility.

“Companies that borrow on a cash-flow basis typically have several, if not many, financial covenants requiring them to perform at a certain level,” Philbrick says.

For instance, conventional financing typically requires that borrowers maintain a minimum level of operating performance to retain a revolving line of credit. Lenders that provide ABL typically focus on borrower liquidity, which allows them to provide far greater financial flexibility.

Retailers and commodities-based companies are ideal examples. The former experience large seasonal shifts in income, while the latter is often subject to economic upswings and downturns that dramatically affect earnings.

 

Does your business have collateral that lenders are looking for? 

Not all collateral is equally suited to an ABL; lenders prefer collateral that is liquid. As a result, they look for assets in the order of preference listed below. This list can help you determine if your collateral will be attractive to lenders when you consider an ABL for your company:

  1. Receivables 
  2. Inventory 
  3. Equipment
  4. Real estate  

The higher assets in that ranking are more liquid, and as a rule of thumb, the faster an asset turns, the more attractive it is to lenders.

By contrast, the following types of collateral tend to be less desirable when securing an ABL: 

  • Receivables that are past due or subject to high dilution levels 
  • Foreign receivables without insurance or not backed by an LC
  • Inventory that is slow-moving, specialized or consigned 
  • Single purpose real estate or equipment that can be difficult to monetize. For example, large facilities, such as a steel mill or foundry, are challenging as collateral, but multipurpose buildings like warehouses near dense city centers are not.

Learn more about which assets are eligible as collateral in an asset-based loan. 

 

Asset-based outcomes

Often, asset-based lending can come through in times of opportunity, Philbrick tells of a client, a family-owned distributor of electronic components. They had a “once-in-a-lifetime opportunity” to buy a large division from a multinational that was exiting the U.S. market. Philbrick says the company used ABL to leverage not only its own working capital, but also the debt capacity of the assets it was buying.

“All of a sudden, they were able to afford this very large acquisition,” Philbrick says. “Long story short, they’ve turned into an incredibly successful company.”

 

Asset-based lending has become more popular than ever. Contact U.S. Bank to learn more about whether ABL is the right financing option for your organization.

Related content

The ongoing evolution of custody: Tips for renewing your custody contract

Evaluating interest rate risk creating risk management strategy

Money Moments: How to finance a home addition

How to fund your business without using 401(k) savings

Protecting cash balances with sweep vehicles

What’s the difference between Fannie Mae and Freddie Mac?

4 benefits of independent loan agents

At your service: outsourcing loan agency work

Changes in credit reporting and what it means for homebuyers

These small home improvement projects offer big returns on investment

Webinar: Mortgage basics: Finding the right home loan for you

Dear Money Mentor: What is cash-out refinancing and is it right for you?

Can ABL options fuel your business — and keep it running?

How to get started creating your business plan

Collateral options for ABL: What’s eligible, what’s not?

ABL mythbusters: The truth about asset-based lending

Are you ready to restart your federal student loan payments?

Gifting money to adult children: Give now or later?

Middle-market direct lending: Obstacles and opportunities

Maximizing your infrastructure finance project with a full suite trustee and agent

How to maximise your infrastructure finance project

How jumbo loans can help home buyers and your builder business

Prioritizing payroll during the COVID-19 pandemic

5 tips to help you land a small business loan

Streamline operations with all-in-one small business financial support

How to establish your business credit score

Opening a business on a budget during COVID-19

When to consider switching banks for your business

What are conforming loan limits and why are they increasing

7 steps to keep your personal and business finances separate

6 tips for trust fund distribution to beneficiaries

Tech lifecycle refresh: A tale of two philosophies

Alternative assets: Advice for advisors

Beyond Mars, AeroVironment’s earthly expansion fueled by U.S. Bank

Test your loan savvy

Webinar: Mortgage basics: What’s the difference between interest rate and annual percentage rate?

How do I prequalify for a mortgage?

Can you take advantage of the dead equity in your home?

Webinar: Mortgage basics: How much house can you afford?

Is a home equity line of credit (HELOC) right for you?

8 steps to take before you buy a home

Webinar: Mortgage basics: 3 Key steps in the homebuying process

Webinar: Mortgage basics: Buying or renting – What’s right for you?

How to use your home equity to finance home improvements

Webinar: Mortgage basics: What is refinancing, and is it right for you?

Should you get a home equity loan or a home equity line of credit?

6 questions to ask before buying a new home

What is refinancing a mortgage?

What to know when buying a home with your significant other

Webinar: Mortgage basics: How does your credit score impact the homebuying experience?

What is a home equity line of credit (HELOC) and what can it be used for?

Is it the right time to refinance your mortgage?

Overcoming high interest rates: Getting your homeownership goals back on track

10 uses for a home equity loan

Is a home equity loan for college the right choice for your student

How to apply for federal student aid through the FAFSA

What to consider before taking out a student loan

Common unexpected expenses and three ways to pay for them

Is online banking safe?

How I did it: Paid off student loans

The A to Z’s of college loan terms

Key considerations for launching an ILP

Costs to consider when starting a business

Questions to ask before buying a car

Webinar: Mortgage basics: Prequalification or pre-approval – What do I need?

Your financial aid guide: What are your options?

How liquid asset secured financing helps with cash flow

An investor’s guide to marketplace lending

What is a CLO?

Personal loans first-timer's guide: 7 questions to ask

What you should know about buying a car

What you need to know before buying a new or used car

Take the stress out of buying your teen a car

How to choose the best car loan for you

Practical money skills and financial tips for college students

Co-signing 101: Applying for a loan with co-borrower

What’s a subordination agreement, and why does it matter?

Understanding the true cost of borrowing: What is amortization, and why does it matter?

How to use debt to build wealth

How I did it: My house remodel

Everything you need to know about consolidating debts

Student checklist: Preparing for college

Resources for managing financial matters after an unexpected death

Webinar: Uncover the cost: College diploma

Your quick guide to loans and obtaining credit

Do I need a financial advisor?

4 questions to ask before you buy an investment property

Parent checklist: Preparing for college

Financial steps to take after the death of a spouse

Evaluating interest rate risk creating risk management strategy

Disclosures

Start of disclosure content

Loan approval is subject to credit approval and program guidelines. Not all loan programs are available in all states for all loan amounts. Interest rates and program terms are subject to change without notice. Mortgage, home equity and credit products are offered by U.S. Bank National Association. Deposit products are offered by U.S. Bank National Association. Member FDIC.