- Why Asset-Based Lending (ABL) is Growing
- Benefits of ABL
- ABL and the Financial Cycle
- How ABL Addresses Uncertainty
- The Future of ABL
Establishing a close connection with lenders who truly understand the business can smooth the path to ABL financing for a wide variety of purposes, from working capital to navigating difficult waters.
Founded in 1923, CSS Industries is the company behind some of America's most storied crafting brands, including McCall's, Butterick, Simplicity and Dudley's. A back-to-basics consumer movement in the early 2000s fueled the company's growth and success to new heights.
However, since the economic downturn in 2007, CSS has struggled against headwinds that include the challenges facing its traditional small retail partners. But there's still value in the storied company, and communicating that value to lenders earned CSS a new $125 million asset-based loan that meets liquidity needs and provides more time to realign the business.
Asset-Based Lending Grows
CSS isn't alone in turning to asset-based lending (ABL). According to the Secured Finance Foundation (formerly the Commercial Finance Association Education Foundation), asset-based lending commitments grew to $465 billion in 2018 (about $164 billion was 2018 starts) with a growth rate projected at 6% to 7% in 2019. Of the seven major categories of the $4 billion market for commercial secured finance identified by the Foundation, only cash flow lending is projected to grow faster.
ABL deal sizes have grown from the days when asset-based lending typically catered to smaller manufacturers. For example, a $105 million asset-based loan facility was a key component of the recent, breathtakingly brief bankruptcy reorganization of specialty online retailer Fullbeauty Brands.
ABL enables borrowers to use their inventory, accounts receivable, and --increasingly-- other types of assets to unlock capital. Lenders take an active role in monitoring the assets as they move through the supply chain and manufacturing process.
Technology has dramatically unlocked more opportunities in asset-based lending, making it easier to assess and monitor those underlying assets, and automating away much of the administrative overhead. This close involvement has a key advantage for borrowers. Because lenders are so closely involved, and asset-based loans are ongoing facilities, ABL rates tend to be attractive compared to other forms of credit.
ABL's Evergreen Appeal
Companies have plenty of financing options. Establishing a close connection with lenders who truly understand the business can smooth the path to ABL financing for a wide variety of purposes, from working capital to navigating difficult waters. ABL depends on the current value of the assets, and lenders tend to be much more involved in monitoring the borrower's business than typical cash-flow lenders. So deep familiarity between the parties is a plus.
Rich Gumbrecht, CEO of the Secured Finance Network, said “One of the most important things an asset-based lending company can do … is to be a real financial partner. That tight integration helps the borrowers as much as it helps the lenders to be successful."
Recent financial challenges have given lenders and borrowers plenty of experience working through desperate financial straits with the support of ABL instruments. Gumbrecht says it was a valuable laboratory to refine covenants and triggers, to recognize the value of more eligible receivables, and to be willing to make rapid changes as the financial situation of the borrower shifts.
Borrowers should ask potential asset-based lenders about how their approach has changed as a result of the lessons of the last business cycle.
How ABL Addresses Uncertainty
Many companies have been significantly affected by new tariffs which caused strong movements in metals pricing, particularly steel and aluminum. The price of some raw materials climbed between 21% and 35% over a 1-year period. In turn, these higher costs put margin pressure on the appliances, autos, and heavy equipment sectors. This uncertainty, combined with the potential for absorbing higher costs instead of being able to pass them on to customers, increases the appeal of ABL facilities in sectors affected by these tariffs.
For companies in high-risk situations, with needs beyond the fair value of their assets, a bifurcated lending transaction can help.
“[A] two-lender approach between an ABL lender and a term lender can be an ideal solution for a financially challenged client. The benefit is that each can focus on what they do best: accounts receivable and inventory financing for an ABL group, and equipment and real estate for a term lender," write Joe Upson and Ken Mann in ABF Journal.
“Having two groups, each with its own distinct specialty areas, may result in added protection for both groups and the potential for increased funds available at closing for the borrower."
Into the Future
ABL is growing significantly faster than the U.S. Gross Domestic Product (GDP), and that is in part due to the wider range of lenders interested in finding suitable borrowers. Gumbrecht says that although non-bank lenders only make up about 10% of the market, their share is growing.
These less-traditional lenders are more likely to issue asset-based loans against intellectual property and less tangible assets.
“Hedge funds, asset managers, business development corporations, and private equity sponsors have all become an important part of this market, with products and structures that are creative and flexible, and I think that's continuing to help the health of the market.
He also sees new opportunities for companies with global supply chains to expand their ABL asset base, as new agreements on receivables at The United Nations Commission on International Trade Law (UNCITRAL) tighter controls over assets recorded and held internationally.
“That will make it easier to lend outside the U.S. on receivables, and that will have a positive impact in the future," Gumbrecht says.
Ready to Help
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