Asset-based lending, commonly referred to as ABL, is a commercial lending discipline whereby a line of credit is structured with a formula percentage advance rate against a borrower’s working capital assets comprised of accounts receivable, and inventory, where applicable. Companies use asset-based financing to create vital working capital liquidity that replenishes liquidity consumed in their cash cycle, (i.e., the timing difference between the funding of operating costs and expenses and the ultimate collection of accounts receivable generated from sales). This is called the working capital cycle and it varies with each business.
Asset-based credit lines are secured by a lien on the borrower’s assets and monitored on a routine basis. The credit line balance floats in concert with the borrower’s working capital investment with the amount of available borrowings determined from the formula percentage advance rates as mentioned above. Ongoing reporting from the borrower enables the lender to track accounts receivable and inventory performance and assure the continued quality of the assets comprising the collateral borrowing base. The lender also conducts periodic field examinations for further testing on the quality of the borrower’s assets and financial health. Field examinations occur prior to the original loan closing and afterwards on a recurring basis, typically two to four times annually.
Credit lines offered by banks and non-bank lenders can run the gambit from unsecured lines of credit to lightly monitored lines of credit to fully monitored ABL lines of credit. Asset-based credit lines differ from more traditional credit lines largely due to the ongoing asset monitoring involved.
Why would a borrower choose an asset-based structure versus a traditional credit line?
Some companies generate levels of profitability and liquidity sufficient to support their working capital cycle and wouldn’t benefit from an ABL structure. However, many companies operate with higher leverage and/or tighter cash flows and could greatly benefit from a properly structured asset-based credit facility. Potential applicants include companies that are growing rapidly, companies that pass through higher amounts of capital to owners, and companies undergoing a recapitalization event such as a purchase.
Univest is pleased to have recently added an asset-based lending solution for our clients and prospective customers. It is a natural and important complement to our existing loan product offerings. Having an ABL option will enable Univest to provide vital working capital financing to those companies that need a different financing solution versus a traditional line of credit. If you are interested in learning more about ABL and whether it could be right for your business please contact us at 215-682-4115.
Univest Bank and Trust Co. is an Equal Opportunity and SBA Preferred Lender.