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)
Consolidating your debt is your one step forward to being debt-free so make the most out of it. Liz Roberts is a freelance writer and loan consultant. The website www.badcreditresources.com offers resources that specialize in providing bad credit credit cards and bad credit loans to people with poor credit score.
Forex Broker - Choosing The Right Forex Broker (2)
A lot of forex brokers make their money by charging their clients commissions. Make sure you check to see this isn't the case before you sign up. Standard Accounts Standard accounts, usually have slightly higher start up costs, anywhere from $5000 and upwards.
The Foreign Exchange Market (FOREX) Uncovered (3)
Most importantly, please understand that before you go rushing to deposit money and start trading make sure you fully understand the market. For more information about fishing visit our comprehensive website at www.currencytrading.ezyinfo.net
Run The Numbers Before Buying An Investment Property (4)
Keywords: real estate, investment, cashflow, real estate calculator, austin real estate People talk about running the numbers before buying an investment property, but before doing that we need to discover what are the numbers and how do you get accurate numbers.
How School Loan Consolidation Can Save You Money (5)
Regardless of which type of school you are preparing to leave, look into consolidating your school loans. What is Consolidation? Consolidating a federal loan is taking all of the student loan payments you owe and combining them into one lump sum.
Saving Money Through Student Loan Consolidation (6)
It is important to go over all your options when choosing a lender for student loans. Even if you have to start making a student loan payment immediately, you will still save yourself more money in the end because of the lower interest rate.
Discover Newly Launched Hedge Funds And Those Who Gained On Exit (7)
Amanda also manages five private equity hedge funds of funds, which have several domestic and international investors. Amanda Group currently has more than EUR 1.3 billion ($1.7 billion) in assets under management and they have made investments in more than 100 private equity funds in Europe, the United States, Asia and Russia.
Selling Your Own Home (8)
Apply this rule to any storage area. 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)
It is important to shop around for the best loan consolidation program because you will only have one chance to go through this process. Once a loan is consolidated, you won't be able to change it.
The Good, The Bad, And The Private Student Loan (10)
Students who need financial aid to pay for college can also receive money through federal grants or scholarships. Federal loans will usually have a fixed interest rate for students to pay back after they graduate.
Is A Home Equity Loan Right For Your Home Improvement Plans? (11)
If you're not sure of what you will need, a home equity line of credit (HELOC) is another good option. Same kind of deal as a home equity loan, save that with a HELOC you can borrow just what you need when you need it.
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)
It also means that you could lower your monthly payments and get a much more secure fixed rate mortgage. It is also possible that if you did not have very good credit when you got your current mortgage, that you could see an even greater reduction in your interest rate.
5 Ways To Obtain A Higher Credit Card Limit (14)
A bad credit report can have many other negative consequences, so you will want to take action to correct the problem as soon as possible. If necessary, consult a credit-repair expert to see how you can resolve the situation in the shortest time possible.
Earnings Matter: S&P And Stock Market Investing (15)
Keywords: index funds, mutual funds, investing The S&P 500 is up about 7.5% thus far this year. That's a good return for just over six months. Will it keep going up?
Filing Your Flood Damage Insurance Claim (16)
If you can, have your name, policy number, and a phone number or e-mail address that you can be reached at handy when you call. This will speed up the process more than you think.
What Is A Mortgage Refinancing Home Equity Loan? (17)
Additions are always a good bet for increasing home equity. Landscaping can also go a long way towards making property more desirable, and therefore should not be overlooked as a way to spend home equity refinance money.
How Do I Get A Business Loan? A Business Plan Is The First Step (18)
It's not necessary to use a gold embossed leather binder, but do use a new binder. Creating a solid business plan is the first step in answering the question: How do I get a business loan?
No Need For Concern With Bad Credit Student Loans (19)
Do not let bad credit ruin your chance to go as far as you want! Mike Selvon portal offers free student loans information. Find out how to cope with bad credit student loans at studentloan.mininicherecommends.com and leave a comment at the blog at www.mynicheportal.com
Consolidate Loan Payments For College (20)
You may even end up saving a good deal of money. Mike Selvon portal offers free student loans information. Find out more about consolidate loan payments for college at studentloan.mininicherecommends.com and leave a comment at the blog at www.mynicheportal.com
Newer Articles Highlighter:
Andorra Tax Haven Introduces Capital Gains Tax (1)
But any hope of the new capital gains tax dampening property prices is unlikely to work, according to Andorra property companies. 'While there is a large disparity between Europe's top two tax havens - Monaco and Andorra - in property prices, the advantages of buying a property in Andorra, gaining residency and having no income tax far outweighs any capital gains taxes', they say, pointing out that Andorra prices are a quarter of those of Monaco's.
Andorra Property Prices Hit 2007 Ice (2)
Keywords: real estate, property, hotels, Andorra, Andorra skiing, Andorra holidays Apartments and chalet prices in Andorra, second only to Monaco in popularity among Europe's tax havens, have risen consistently over the last decade by an average of ten per cent a year, and in the last two years by over fifteen per cent.
Tax Haven Property 2007 Gets An Icy Chill (3)
The nearest airports are Barcelona and Toulouse. Recent improvements in the road from Barcelona to Andorra though have cut the travelling time by some thirty minutes to two hours fifteen minutes.
Monaco Real Estate Prices To Overtake London Again? (4)
In recent years the UK market has accounted for much of Monaco's property price rises, as the number of buyers has increased to 40 per cent of the total market, but in recent months buyers from other European countries and from further afield, Australia and Canada in particular have been noticeable.
Taxes You Must Consider Before Passing On Your Properties To Your Heirs (5)
If you intend to pass on property/cash to your grandchildren through a generation skipping trust, you have to pay a generation skipping transfer tax. 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.
A Tax Guide To Manage Your Estate Taxes Effectively (6)
As you can never be sure of political promises in view of perpetual economic and political changes, it is advisable to take proper steps to reduce the size of your taxable estate now.
How Can Gifts Help You Reduce Your Estate Taxes? (7)
Gifts to cover someones tuition or medical expenses paid directly to an educational institution or medical service provider. Gifts up to $12000 to a person in one calendar year.
Tips To Curtail Your Estate Taxes (8)
These units would be eligible for marketability and/or minority discounts. When you gift these units, you can bring down the value of annual gifts within the exclusion limits by applying these discounts.
What Are The Current Tax Rules You Must Consider For Your Estate Planning? (9)
Medical expenses that are not covered under insurance can also be paid without attracting any tax. Forming trusts has already been mentioned above and includes life insurance trusts, charitable trusts, living trusts, revocable trusts, personal resident trusts, credit maximizing trusts etc.
The Second Mortgage Home Equity Loan (10)
A second mortgage, or home equity loan, is another loan in addition to the primary loan, which will result in two monthly payments. It is important to distinguish the two to make sure that two payments will not seriously affect your monthly budget.
Financial Security In An Unstable Economy (11)
4. Make a List of Necessities: Make a list of the necessities that you need to live: rent, mortgage, clothes, food, etc. After this, make a list of the discretionary things.
Medical Equipment Acquisition And Leasing (12)
These factors can be impacted by incentives from the vendor, but ultimately the same evaluation needs to be done If you are just starting out, your current cash position may dictate that you finance the equipment.
The Many Faces Of Student Loans (13)
These loans can be for undergraduate degrees, graduate degrees, and specialist programs, such as medical or law school. The premise behind a student loan is the student loan repayment must start, with interest, to the lender within a certain time frame after graduation.
Are Balance Transfer Credit Cards On The Way Out? (14)
Jon Francis has been involved with finance for many years! With an in-depth knowledge of the credit card UK market and helps others get the best from a credit card.
A Simple Way To Cut Your Monthly Expenses (15)
Recurring revenues are a wonderful way to make money if you own a business. To best understand this system, think about your cable or satellite TV. Each month, you send a payment to your provider to receive your programming.
Why Is Estate Tax Planning So Important? (16)
As such, in case when such care becomes necessary it is your spouse or other family members who have to foot the bill. The remedy is to take out a long-term insurance policy.
Using An 80 20 Mortgage To Avoid Mortgage Insurance (17)
The benefit of going with the line of credit as the second mortgage is that the interest rate is normally much lower than the fixed second mortgages rate. They can also be an interest only loan which could save you hundreds of dollars in mortgage payments every month.
Parents Face 'Mounting Costs On Nurseries' (18)
Vicky Emmott, senior manager of underwriting for Halifax, said: 'The new baby boom is all about the amount parents are spending, to ensure their children start life in a luxury home nursery.
Garbage In, Garbage Out (19)
Warren Buffett, possibly the greatest investor today, says he spends a lot more time reading and learning, than buying anything. And when he buys a stock or business, he's very confident of his choice.
Should You Buy A Foreclosure Home ? (20)
One of the most popular ways that buyers do this is to buy a foreclosure home. There are two types of foreclosures that you can buy and you can save a lot of money with each type.