Business Guidance

How Businesses Can Utilize Asset-Based Lending in a Slowing Economy

Although the economy has rebounded strongly from the effects of the pandemic, it has begun to overheat over the past year. This overheating of the economy has resulted in the highest levels of inflation we have seen in 40 years. In order to bring inflation back to its target levels of 2% annually, the Federal Reserve has raised interest rates over the past several months and it is expected that the Fed will continue to raise rates until inflation can be brought under control.

Increasing interest rates have historically caused the overall economy to slow and, at times, enter a recession which many economists have begun to warn is a possibility. Traditional business financing, which relies on the strength and stability of a company’s cash flow, works well for many companies when the economy is growing. When the economy slows and cash flows begin to contract, some businesses may be eligible for additional borrowing capacity based on the assets they own. For those businesses, asset-based lending, or ABL, may be preferable.

Asset-based loans are revolving lines of credit that are secured by the borrower’s assets. How much credit a borrower can access is primarily determined by the quality and value of the collateral which can range from accounts receivable and inventory to equipment and real estate as well as brand names and intellectual property.

Companies of all types use ABL financing for a variety of purposes:

  • Working capital 
    • Turnaround financing 
    • Refinancing/restructuring
    • Recapitalization 
    • Capital expenditures  
    • Acquisition financing
    • Funding growth

Utilizing an ABL structure can provide a range of benefits:

  • Increase borrowing power, especially for companies with less predictable earnings and cash flow
    • Potentially gain more time to address financial difficulties caused by a slowing economy
    • Enhance discipline and efficiency around accounts receivable and inventory for more borrowing capacity
    • Reduce financial covenants, including restrictions around the level of debt to enterprise value or cash flow, and net worth-focused covenants

If a company is seeking financing solutions of $5 million or more, they may benefit from the flexibility and versatility of an asset-based structure. Whether the company is in a turnaround situation, needs a larger or more flexible financing solution, or is planning an acquisition the, the lending team at Univest who specializes in ABL can help meet the unique needs of local businesses. Contact Bill Wilson at 215-682-4115 to explore the possibilities.

Univest Bank and Trust Co. is Member FDIC, Equal Opportunity and SBA Preferred Lender.