Challenging business conditions over the past eighteen months serve as a reminder that businesses often encounter economic adversity. Sometimes that adversity is associated with a specific industry and sometimes it is widespread due to impossible to predict events such as a pandemic. Understanding the specific financial needs of businesses through both plentiful and lean times is vital to determining appropriate financing that enables the business to run smooth operations without interruption.
A well-known financing solution for businesses that experience economic adversity or operate with a typically higher risk profile is asset-based lending (ABL). Factors that could make ABL a viable financing option for a business include challenges within a specific industry, higher financial leverage, cyclical production, or constrained cash flow or earnings. These unique circumstances don’t discount the viability of a company – they just create the need for a more tailored financial solution.
Perhaps a company has a higher risk profile because the owner takes capital out of the business for personal use, such as to purchase real estate. Another scenario that could create the need for ABL financing would be if a company is making an acquisition. In that case, the business may need to carry more debt for a period of time in order to complete the transaction.
ABL is based on a lending formula against collateral such as accounts receivable, inventory, machinery/equipment and real estate, if applicable. Additionally, dominion of cash is required so that a borrower’s collections are deposited directly with the bank and applied to the outstanding loan. Strides in technology have allowed us to facilitate these daily transactions quickly and efficiently. For more on the technical nature of ABL, my previous article details the specifics.
Here is an example to bring this lending solution to life. A lumber company may have to buy its supply in bulk during the dry season. If their inventory only turns over twice a year due to the seasonal nature of the business, we could work with them to provide financing that supplements cash flow needs by lending against the existing inventory. With ABL we can support these strong businesses through their business cycles by providing access to capital even when a company doesn’t fit “traditional” bank loan parameters.
There are a range of businesses from manufacturing to wholesale distribution to service and staffing companies for which ABL is a viable financing option. We’ve worked with lumber product wholesalers, automotive aftermarket parts e-tailers, kitchen accessory wholesalers, pharmaceutical distributors, and apparel manufacturers — the list goes on.
The key for a successful partnership is to build trusting relationships by understanding the businesses we finance and tailoring our financing package to provide ample liquidity and flexibility for our customers. With knowledge of the unique nature of customer’s business we help them achieve their financial goals with well-structured asset-based lending solutions. To learn more about this financing option and have conversation about if it is a fit for your business, contact me at 215-682-4115.
Univest Bank and Trust Co. is an Equal Opportunity and SBA Preferred Lender.