Asset Based Loans (ABL) is a form of lending where the borrower/company uses its assets, usually working capital assets, account receivables and inventory to support the loan request.
The company continues to own the assets because the company has pledged the assets to the lender to support the loan. If there is a default on paying the loan, the lender can seize the assets.
The interest rate and fees on ABL are typically higher than traditional bank loans for the lower middle market borrower. Lenders make lending decisions based on a review of the asset quality, the financial records and the length of time the company has been in business. The lender may seek a personal guarantee.
When accounts receivable serve as collateral to secure the loan, the company may get roughly 75 percent of the face value of new invoices. The loan-to-value ratio drops rapidly for older accounts.
When inventory is the collateral for ABL, the lender will usually advance a lower percentage against the “eligible” collateral and will generally exclude work-in-process as an eligible category to lend against. Advance rates can range from 25-80% depending on the actual type of inventory being financed.
For fast-growth companies unable to afford to finance long working capital cycles or credit losses, factoring is a way to obtain cash quickly.
In contrast to accounts receivable financing, factoring means the company actually sells the accounts receivable to a factoring company for cash. The factor assumes the credit risk for the outstanding invoices. The company may get 80-90 percent of its invoices face value up front.
Once the factor collects, the company receives the remainder less the fees and interest rates. The cost may be as high as 20 percent annually.
Given the nature of its reliance on asset-intensive businesses, ABL tends to work best in industries with a large amount of accounts receivables and inventory. These include wholesalers, retailers, rental companies, oil and gas, automotive and durable goods manufacturers.
Commercial and asset-based lending representation requires legal knowledge and specialized expertise encompassing aspects of perfecting and enforcing security interests in real and personal property, as well as related bankruptcy, tax and environmental law.
Our firm has extensive experience in structuring ABL transactions along with perfecting security interests, working out and restructuring problem loans and enforcing creditor’s rights. We work with lenders across a broad spectrum of businesses, and understand the various issues that arise for the lender in documenting and closing a secured transaction.