Persistent inflation, rising interest rates, geopolitical turmoil, supply chain disruptions, labor shortages and the probability of an economic downturn pose potential meaningful concern to consumers and businesses alike.
“As external factors put pressure on some businesses, some may have concerns over liquidity and access to capital,” noted Barry Bobrow, head of Credit Markets, Regions Business Capital (RBC). “That is where the asset-based lending (ABL) can come into play and offer businesses facing cash-flow pressures an alternative to traditional cashflow-based lending.”
Bobrow, a veteran of the asset-based lending world with more than 35 years of finance experience, joined Regions in late 2022 to lead credit markets for RBC as part of the team’s growth strategy under Courtney Jeans, head of Regions Business Capital. Bobrow is also the new president of the primary trade association for asset-based lending, the Secured Finance Network.
“In addition to asset-based lending, RBC has several specialty lending businesses,” said Bobrow. “Our team can provide liquidity to non-bank asset-based lenders through our Lender Finance business and provides supply chain financing and off-balance securitizations of receivables.”
What is Asset-Based Lending?
A type of debt financing, asset-based lending places heavy reliance on the value of a company’s assets, predominantly accounts receivable and inventory. Asset-based loans can also finance fixed assets such as real estate and machinery and equipment, though only in conjunction with receivable and inventory financings.
“In the course of underwriting any loan, bankers focus on potential sources of repayment,” said Bobrow. “In cash-flow lending the primary source of repayment is a company’s projected cash flow, while in asset-based lending the primary source of repayment is the value of its assets if converted to cash.”
Asset-Based Lending as a Financing Alternative
“We are in a period of uncertainty and many companies worry about the stability of their financing and may want to consider alternative financing, such as asset-based loans,” said Bobrow. “Because the primary focus is on asset values versus cash flow, asset-based structures can be very flexible with respect to financial performance.”
Businesses concerned with the constraints and risks of covenants in a traditional lending structure will find that the covenant structures in ABL allow companies more flexibility.
According to Bobrow, an asset-based loan can be the best financing tool for borrowers going through cyclical or secular challenges in their business.
“It’s not always about companies experiencing stress,” Bobrow noted. “Asset-based loans can be utilized by companies that are growing rapidly and simply need more working capital financing to facilitate that growth.”
Because of the nature of their business, some companies have a high level of working capital per dollar of revenue. Bobrow says that’s a perfect application for an asset-based loan because the amount the bank can lend on that working capital through an asset-based loan can play a significant part of the overall capital structure. He notes that fixed assets can also be an important part of the borrowing base with ABL.
It’s not always about companies experiencing stress. Asset-based loans can be utilized by companies that are growing rapidly and simply need more working capital financing to facilitate that growth.
“Asset-based loans are also cost competitive and usually the least expensive part of a borrower’s capital structure,” said Bobrow. “This means many borrowers can achieve both better pricing and better flexibility with an asset-based lending versus a cashflow-based lending structure.”
Is Asset-Based Lending Right for Your Business?
Bobrow says that to determine the right type of financing, a borrower needs to evaluate factors such as total debt capacity, flexibility of covenants, and overall cost of capital.
With interest rates and inflation at elevated levels and many companies seeing a slowdown, credit quality can become a concern, especially with traditional lending products. Some borrowers may be at risk of default of their covenants, which could in turn lead them to seek alternative financing arrangements.
“The potential impact of the current economic environment is going to be different for each business and each situation,” Bobrow noted. “In many situations an asset-based solution provides the lowest all-in cost of capital and the greatest flexibility.”
Asset-based loans in many cases are a long-term versus an interim solution. Bobrow explains that the loan could be structured as a revolving loan, based upon available liquidity of the borrower. And he notes that in many cases, that is going to be the best solution for a company. Additionally, there are certain industries where asset-based loans have become the dominant source of financing.
“For many industries, businesses aren’t choosing the asset-based loan because there are no other alternatives,” said Bobrow. “They are choosing it because it’s the best. I would point to retail, building products manufacturers, food service distributors, and oilfield service companies as examples of industries where asset-based lending is the dominant form of financing.”
Additionally, depending on the financing needs of a business, asset-based loans combine easily with other types of debt in a capital structure. These include equipment finance, supply chain financings, private debt, and other public debt such as bonds and institutional term loans.
“I think we are doing our best for our clients when we can provide a range of alternatives,” Bobrow shared. “Our goal is to really know and understand each client’s unique needs and goals for their business, then lay out the solutions to address any financial challenges. In today’s economic environment that often points to the use of an asset-based loan.”