May 26, 2018
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Asset-based lending: Not the business loan of last-resort losses

By Jamie St. Clair, Special to the BDN

Asset-based lending has matured and become part of the mainstream. Borrowers increasingly favor ABL for its flexibility and for access to capital they otherwise might not obtain. Lenders favor ABL because it causes borrowers to impose operational and cash management discipline under ABL reporting requirements.

Asset-based lending began to become more accepted in the 1980s recession and then was seen as lending of last resort: If a company couldn’t recover out of ABL, it often would not survive. However, as ABL lenders became more sophisticated, ABL evolved into a permanent source of capital during the mid-1990s and has become a flexible, stigma-free source of business financing.

Asset-based lending can be defined loosely as lending secured by an asset. A home mortgage is a form of ABL, as are car loans, to name some common consumer loan examples. In the business world, ABL mainly means lending to businesses using assets as collateral that are used in typical loans, but due to excessive leverage or impaired cash flow, typical loans are not available to the borrowers. By looking at accounts receivable, inventory, equipment, real estate and other assets, an ABL lender can make the loan even if a borrower’s balance sheet and cash flow are not in harmony.

This allows lenders to place less reliance on leverage and lend to companies that don’t meet traditional underwriting standards or which have ratios that investors would not accept. Covenants that include liens and reporting requirements protect lenders, while borrowers get liquidity when they need it.

Is ABL right for my company?

Many sorts of companies can take advantage of ABL, but they are typically asset-intensive firms and companies in cyclical industries, including manufacturers, distributors, wholesalers and certain service businesses. These companies typically own production and transportation equipment and inventory.

Often they are companies in transition, and ABL can help companies moving upward or downward.

Companies in transition may be distressed and retrenching, for example, needing liquidity to regroup. Or they may be more optimistic, seeking to expand their business either by investing in new product lines for domestic markets or through acquisitions or entering new markets.

In some cases, seasonal business cycles may require investment in inventory in one quarter with little or no income until a subsequent quarter. For example, a manufacturer of lawn furniture must build inventory through the fall and winter, but will not see sales and profits until the spring buying season. ABL is ideal for this situation, having the ability to provide capital when a company lacks asset coverage in the balance sheet to support a short-term loan, but must invest in materials, labor and equipment to build inventory.

Companies that have tried ABL lending have found that adjusting to the administrative requirements of an ABL relationship — which typically includes detailed and regular reporting to the lender — provides discipline to their business and improves their ability to manage cash.

ABL — What to look for in a lender

For ABL financing, a company should seek a lender that is strongly positioned through:

• Detailed industry knowledge, allowing the lender to assess a borrower’s assets and needs realistically.

• A clean loan portfolio, which confirms successful lending experience and expertise.

• The ability to deliver a single, flexible covenant structure based on a measure of earnings to fixed charges, including principal, interest and capacity.

Lenders with the expertise and experience to make successful ABL loans put reporting requirements in place to monitor a borrower’s financial performance under loan covenants and liquidity position. Depending on the borrower’s condition, reporting may be required monthly or as often as daily.

Lenders also work closely with borrowers to minimize the costs of borrowing by offering sweep accounts that collect cash on hand or ACH payments at the end of a business day and allocate those funds instantly to pay down the outstanding balance.

While lenders always file liens against borrowers’ working capital assets, the covenants on ABL loans protect both parties.

ABL helps in longer-term, general business cycles

When a company in transition stabilizes and resumes its healthy growth, it may choose to “graduate” from ABL back into a more traditional financing arrangement. The company also might return to ABL if and when the need arises. These decisions could be the result of dynamics in the broader economy or of fluctuations in the specific industry — factors that cause balance sheets to grow and shrink.

Many companies have found their ratios turned upside down during the recession. As revenues declined, reduced earnings affected their ratios. As a result, their ratios no longer fit the traditional middle-market financing model. However, since ABL lenders are less concerned with leverage and focus on accounts receivable, inventory and other assets, they can look at the borrower from different perspectives and see hidden value.

That practical and informed assessment can influence a lender’s decision and allow ABL financing to provide the liquidity that a company in transition requires.

Jamie St. Clair is vice president and Bangor area retail leader for KeyBank. He may be reached at 945-0639 or by email at

Editor’s Note: The Bangor Daily News welcomes submissions for business columns. They should be 650-850 words and should be unique to the BDN and pertinent to the Maine business community. Columns, a head-and-shoulder photograph and a short bio may be sent to

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