Asset Based Lending As A Financial Tool
Keywords: asset based loans, asset based lending, DIP financing, working capital, cash flow, debt , business loans
Many Chief Financial Officers and other finance executives view asset based loans as a financing outlet of last resort. While that may sometimes be the case, such a view is a one-dimensional perspective. But as companies confront a tight credit market coupled with lower than expected results, many CFO’s are viewing asset based lending as a viable option in the financing tool kit. Even successful companies with strong banking relationships can quickly fall out of favor with lenders and lose access to unsecured financing, especially if they’ve shown recent losses.
A few bad quarterly results doesn’t necessarily mean that a company is in bad shape. But stringent bank underwriting parameters can cause existing loans to be called and prevent the firm from qualifying for new financing. A company facing such a scenario can use asset based lending (ABL) arrangements as bridge loans to pay off banks and provide liquidity until bank financing is achievable.
What is asset based lending?
An asset-based loan is secured by a company’s accounts receivable, inventory, equipment, and/or real estate, whereby the lender takes a first priority security interest in those assets financed. Asset-based loans are an alternative to traditional bank lending because they serve borrowers with risk characteristics typically outside a bank’s comfort level. These assets typically have an easily determined value. The financing can take the form of loans to revolving credit lines to equipment leases and can range from $100,000 to $1 billion, depending on needs and circumstances.
How can ABL be a beneficial financing option?
Acquisitions
To grow a business, a company may look to acquire a strategic partner or even a competitor. Asset-based financing is often an efficient means to obtain funding for business acquisitions.
Turnaround Financing
Turnaround financing is often used by under-performing businesses that are not achieving their full potential. In some cases, it is used for businesses that are either insolvent or on their way to becoming insolvent. Asset-based lenders are accustomed to the bankruptcy process and asset-based financing is ideal for turnarounds because of its flexibility.
Capital Expenditures
Capital expenditure is the money spent to acquire and/or upgrade physical assets such as buildings and machinery. Capital expenditure is also commonly referred to as capital spending or capital expense.
Debtor-in-Possession (DIP) Financing
Debtor-in-possession (DIP) refers to a company that has filed for protection under Chapter XI of the Federal Bankruptcy Code and has been permitted by the bankruptcy court to continue its operations to effect a formal reorganization. A DIP company can still obtain loans–but only with bankruptcy court approval. DIP financing, which is new debt obtained by a firm during the Chapter XI bankruptcy process, allows the company to continue to operate during a reorganization process. Asset-based lenders also provide exit financing or confirmation financing to companies coming out of bankruptcy.
Growth
Typically, as a company grows so does its need for financing. Also, as a company’s collateral grows, its assets can strengthen its ability to borrow. An experienced and creative asset-based lender can assemble a credit facility that can scale to grow with a company.
Recapitalization
Recapitalization is the process of fundamentally revising a company’s capital structure. A company might recapitalize due to bankruptcy or replacing debt securities with equity in order to reduce the company’s ongoing interest obligation. A leveraged recapitalization typically achieves just the opposite–by taking on a material amount of debt, the company increases its ongoing interest obligation but is able to pay its shareholders a special dividend.
Refinancing/Restructuring
When a company enters or exits a growth stage, refinancing or restructured financing may be key to creating a capital structure that better meets the needs of the company. This type of financing is often used for market expansion, completing an acquisition, restructuring operations, or following a successful corporate turnaround.
Buyout
A buyout is the purchase of a controlling percentage of a company’s stock. In a leveraged buyout (LBO), the acquiring company uses the minimum amount of equity to purchase the target company. The target company’s assets are used as collateral for debt, and its cash flow is used to retire debt accrued by the buyer to acquire the company. A management buyout (MBO) is an LBO led by the existing management of a company.
What are the advantages to ABL?
* Tends to feature fewer covenants than other types of financing and those it does include tend to be more flexible. Cash flow loans, by contrast, often have four or five covenants including total leverage, fixed charge coverage, and minimum net worth.
* If a company is growing, the receivables and inventory it uses to secure the asset based loan is likely growing as well. Thus, the company has a greater collateral base and can borrow funds to fuel its growth.
* ABL instills discipline. Since the loans are based upon accounts receivable and inventory, the company is motivated to improve collections and complete the production cycle in a timely manner.
* As mentioned earlier, ABL imposes less stringent covenants compared to cash flow loans. These type of loans also provide better security to the lenders, which in turn allows them to grant more time to the borrowers to turn their company around in difficult times.
What are the disadvantages of ABL?
* Since the level of funding is contingent upon the asset values on the balance sheet, there may not be sufficient liquidity. Only asset rich companies would likely benefit, while many service companies would not.
* Such a requirement can be difficult for the company.
* Asset based lending tends to be more expensive than other types of financing, often three to five percentage points above traditional bank financing.
* ABL runs counter to the thinking of a lot of CFOs who believe it is dangerous to tie short term assets to long term financing.
Although asset based lending is now a common financing tool, it is not for everyone. It makes sense to explore all types of financing before deciding if asset based lending is the right choice. The CFO must review the state of the company’s credit, analyze the firm’s asset structure, and its current debt load. Asset based lending can provide the liquidity needed for the company to grow until less expensive bank financing is available.
Kent Harlan has been a CPA since 1984 and is the owner of Ozarks Capital Funding, a Missouri-based company offering financing in the areas of accounts receivable factoring, equipment leasing, asset based lending, and financing for healthcare providers.
ocflink.com
Previous Articles Highlighter:
What Are The Benefits In Obtaining Debt Consolidation Services? (1)
If you want, you can have your payment directly deducted from your account each month so you can be sure you wouldn't miss any payment. This is your chance to be get away from the stress of too much debt.
Forex Broker - Choosing The Right Forex Broker (2)
This usually ranges anywhere from $1000 - $10,000 depending on the broker and the type of account you wish to open. There are usually three different accounts - a mini account, standard account and an advanced account.
The Foreign Exchange Market (FOREX) Uncovered (3)
Today it is the largest and most liquid market in the entire world! Daily dollar volumes of monies traded in the currency market exceeds $1.9 trillion. Since profit can be made from both increases and decreases in a currency it means the Forex market is highly appealing and can be very lucrative for anyone willing to give it a try.
Run The Numbers Before Buying An Investment Property (4)
One thing to consider is to put more down because the more you put down, the less your loan will be, which means less monthly interest to pay. Another consideration is the type of loan.
How School Loan Consolidation Can Save You Money (5)
All students who are bound for college have different needs. Because of this, you must investigate all of your options. Your financial aid advisor will help you gain a working knowledge of a school loan consolidation and the benefits associated with it.
Saving Money Through Student Loan Consolidation (6)
By consolidation, you will lump all of your loan payments together, giving you one loan payment to make to one lender. Over time, this can save you money because consolidation allows you to lock into a lower interest rate.
Discover Newly Launched Hedge Funds And Those Who Gained On Exit (7)
G Squared Group Asset Management has teamed up with hedge fund services provider VanthedgePoint Group LL by purchasing a 10% minority stake and is launching a fund of hedge fund comprised solely of its emerging manager clients.
Selling Your Own Home (8)
TIP # 4 Some potential buyers will be working with a real estate agent. If a Potential Buyer is working with a Realtor, always leave your house for a few minutes while the Realtor is showing it.
Student Consolidation - Making Your Loan Manageable (9)
Trying to pay off a loan without a steady job can be difficult, so you need to find a program that fits your needs. Student consolidation payments will be longer than your original loan payments because it is a larger sum.
The Good, The Bad, And The Private Student Loan (10)
Students who research various loan sites will encounter thousand upon thousands of possibilities, all offering low rates, and fast application processes. Students who are uninformed about the type of student loans available end up making a poor decision that costs them more money in the end.
Is A Home Equity Loan Right For Your Home Improvement Plans? (11)
Step three is to consider how you plan on paying off your loan. Can you cope with paying more than the bill says is due? Can you cope with a balloon payment in a few years?
Getting Out Of Debt (12)
Keywords: debt consolidation, debt management, iva, ivas, debt help Numerous factors get us into debt, some of these include the circumstances of the borrower, debt collection practices employed by creditors, benefit entitlements and the effect of court proceedings, but more importantly to consumers is how do you stop the spiral and get out of debt?
Should Refinancing Your Mortgage Be In Your Future? (13)
Get A Better Interest Rate If you watch the market rates, you will know when you have a good opportunity to get a better interest rate. Lower interest rates will mean that it is a good time to refinance your mortgage.
5 Ways To Obtain A Higher Credit Card Limit (14)
5. Always pay your outstanding balance on time. This indicates that you are a good borrower, which translate to lower credit risk. Besides paying on time, you should try to pay the full amount instead of the minimum sum.
Earnings Matter: S&P And Stock Market Investing (15)
And aren't all the Wall Street analysts talking about 2008 earnings? Yes to both (although December 31, 2008 is 18 months away, so maybe there's some uncertainty). 2008 S&P earnings are projected to grow by 7.5%.
Filing Your Flood Damage Insurance Claim (16)
Keywords: water damage , water damage restoration, mold remediation, mold removal A flood can be a homeowners worst nightmare, especially if it engulfs almost the entire house like many of the homes that were made uninhabitable by Hurricane Katrina a few years ago.
What Is A Mortgage Refinancing Home Equity Loan? (17)
When applying for a home equity mortgage refinancing loan make sure that you deal with a lender that offers you the best terms at lowest rates. Your credit report will show them your credit history, whether you've paid your bills on time and who you may be in debt to.
How Do I Get A Business Loan? A Business Plan Is The First Step (18)
A banker would probably also want to see an aged listing of your accounts receivable and payable. A list of your major accounts would be appropriate as well. Bankers use the information to learn about the company and the principals.
No Need For Concern With Bad Credit Student Loans (19)
Even with very bad credit, you can still pursue your dream of attending college. All you have to do is research the number of options that are out there for private and federal student loans.
Consolidate Loan Payments For College (20)
Two of the most common loans students apply for and use are Stafford loans and Perkins loans. However, if you decided to take out private loans to pay for college, then you won't be able include them in a federal student loan consolidation program.
Newer Articles Highlighter:
Andorra Tax Haven Introduces Capital Gains Tax (1)
Long Term Benefit 'Besides the increase in property prices that offset any Capital Gains Tax', they continue, 'It's on a sliding scale, with one per cent reduced for each year of residency.
Andorra Property Prices Hit 2007 Ice (2)
'We normally seen an influx of buyers from the first week of December through to mid April who want to buy ski apartments, but it has been very slow this year,' they comment, adding 'It's been an unusual ski season as there was next to no snow between December and mid January.
Tax Haven Property 2007 Gets An Icy Chill (3)
A notarised copy of the applicants passport, birth certificate and a certificate of good conduct from the home country are submitted at the same time. According to a local travel guide residency normally takes between three and six months to be approved.
Monaco Real Estate Prices To Overtake London Again? (4)
It is possible that the new island will be incorporated into future Monaco Grand Prix, which could give more overtaking opportunities. One Monaco property company reports that new enquiries are running at a high rate, with many buyers keen to buy now in case prices go up more, either for residency, or more commonly than before for investment.
Taxes You Must Consider Before Passing On Your Properties To Your Heirs (5)
Currently the rate of tax is a flat 45% with an exemption limit of $2 million, which is set to rise to $3.5 million in 2009. This tax also will be abolished from the 1st of January 2010.
A Tax Guide To Manage Your Estate Taxes Effectively (6)
You can additionally gift another $12000 towards his board, room, books, and other expenses without paying any gift tax. If your spouse is also a tax payer, the same entitlement would be available for him/her.
How Can Gifts Help You Reduce Your Estate Taxes? (7)
However, the amount would be taxable in the estate of your spouse on his/her death if the estate were larger than the exemption limit unless suitable plans are implemented before the second death to take care of applicable estate taxes.
Tips To Curtail Your Estate Taxes (8)
Forming an insurance trust can cost below $1000 but can save substantially on estate tax, which can take away nearly half the proceeds if the size of the estate is above the exemption limit.
What Are The Current Tax Rules You Must Consider For Your Estate Planning? (9)
In one way, gift and estate tax are tied together. Simply stated, if the sum of the amounts of the taxable estate and the total of gifts in excess of $12000 over the years comes up to the federal estate tax exemption limit of $2million, no gift tax or estate tax is payable.
The Second Mortgage Home Equity Loan (10)
The key issue for anyone getting this type of loan is the amount of equity they have in their home. This will ultimately determine the amount of money that can be secured for the home owners use.
Financial Security In An Unstable Economy (11)
You will be able to come up with a plan that will take you from paying someone else, to becoming the person who other people are paying. Dr. Proactive, Randy Gilbert enjoys producing the "Inside Wealth Success Show".
Medical Equipment Acquisition And Leasing (12)
In many cases, the income generated by the equipment can exceed the payments.) Funds not expended for a cash purchase can possibly earn a higher-income yield than the interest rate of the loan.
The Many Faces Of Student Loans (13)
Private loans also require a student to submit their credit history, and the interest and fees paid on the student loans are based upon the student's credit score. Parents may be required to co-sign for a private student loan, making them responsible if the student has to defer payments at any time.
Are Balance Transfer Credit Cards On The Way Out? (14)
There was also no interest to pay if the balance was transferred to another card. To circumvent those who shifted their balance from one card to another, the issuing companies began imposing conditions.
A Simple Way To Cut Your Monthly Expenses (15)
Any time you buy a product on finance plans, whether it's a car, a refrigerator, or anything else, you're choosing to pay more for the product. Of course, 0% interest loans are a great tool, but some of these come with hidden charges, so you have to be careful.
Why Is Estate Tax Planning So Important? (16)
It expressly states your wish in this regard and acts as a bar for anyone to speak on your behalf. .. Prepare a health care power of attorney:- This document is to authorize a specific person to decide upon your healthcare measures when you fall in an unconscious or vegetative state or are unable to take your own health care decisions on account of any other reason(s).
Using An 80 20 Mortgage To Avoid Mortgage Insurance (17)
By obtaining a second mortgage or home equity loan for 20 percent of the homes cost you can circumnavigate this requirement by using that second loan as the down payment.
Parents Face 'Mounting Costs On Nurseries' (18)
Meanwhile, those from the Midlands were reported to be "pretty thrifty" as the cost of decorating and fitting out a room for their child is less than 790 pounds. Overall, Scottish parents were reported to be the most economical in the country as they shell out some 574 pounds.
Garbage In, Garbage Out (19)
What are his credentials? What is his experience? Ask your advisor whether he makes his money giving financial advice, or whether he is financially successful himself, and gets his income from elsewhere.
Should You Buy A Foreclosure Home ? (20)
While it takes a great deal of extra work and planning to buy a foreclosure home many people feel that the rewards they receive are well worth the effort. In many cases, foreclosure homes can be purchased for a fraction of what they would cost on the real estate market.