17 Feb Asset-Based Loans
In today’s less-than-liquid market you should recognize the assets you own as your greatest asset when it comes to selling your business. The tightening of the credit markets has made it much more difficult for smaller business borrowers to obtain the credit necessary for the buying and selling of businesses. However, for those who own business assets, credit always flows a bit more easily.
What can you constitute as an asset to develop a borrowing base? Trademarks, software licenses, copyrights, patents, machinery, land & other IP and physical, tangible assets can all contribute to the amount that an Asset-Based Lender (ABL) is willing to contribute. Because your borrowing base is so often determined by the revolving lines of credit your business holds (up to 85% for AR and up to 65% for the value of your eligible inventory–even more if your inventory is considered a “hot” sell-able item), be sure you do not fail to mention all assets your business holds. Assets you have are your greatest asset when it comes time to secure capital as a loan. Acting as collateral, these assets present a great way to access larger lines of credit and greater liquidity, especially during times like these when the market is tightened for credit. Another option that gives even more versatility is the ability to acquire a term loan where the collateral for the loan is based on a combination of both assets and cash flow.
Unlike cash flow-based loans, asset based loans can be much more effective at pulling out lines of credit during rough economic times where cash flow is often low and where the market is squeezed. However, with asset-based loans the financial covenants for borrowing can be limited.
ABLs have several additional unique features which are worth noting:
- They can make use of the fixed-charge coverage ratio to determine if the free cash flow could cover the company’s regular expenses, including leases and interest payments.
- ABLs can allow you proceed around the financial covenants of a standard loan by working around the requirement for free cash flows and using the assets of the business. This allows you to proceed with expansion plans, the repurchase of stock or payouts of a dividend to shareholders.
- It allows for a recalculation and often an expansion of your borrowing base if you have assets that can be borrowed against as collateral. If you had only been using cash flow in the past, you are now able to expand based on assets, cash flows or both.
When you collect payment from your customers, the amount in your accounts receivable is diminished. You will then request for an advance of cash for the time when inventory payment comes due. The ABL then allows cash to flow into your business. Manufacturing and distribution-based businesses are especially ideal for obtaining an ABL.
Because cash flow based loans can often be limiting to the amount a business owner is able to borrow, ABLs offer a unique mix that can help your business expand by receiving the liquidity it needs during the “down” times. Borrowing against assets is an effective tool to making this happen. If you are looking to pursue business growth initiatives and need the capital to expand, an asset based loan may be a good option.