Asset-based loans (ABLs) were once viewed as a last-resort financing option for struggling companies.
Today, they have shed that reputation and offer flexible financing for healthy, asset-strong businesses.
Lenders extend ABLs based not only on a borrower’s creditworthiness and balance sheet strength but also on the quality of supporting collateral. Companies use ABLs for working capital or growth investment needs.
ABLs can be structured as revolving lines, term loans or both. Collateral to back the loan can include unrestricted cash, receivables, inventory, equipment, real estate and even intangibles like intellectual property. ABL financing is formula-driven against these assets. For example, a company might have an ABL credit facility allowing it to borrow up to 60% of inventory value and 85% of accounts receivable value.
Flexibility makes ABLs attractive
The availability of financing grows and shrinks with the corresponding availability of a company’s assets. ABLs are customized to fit a company’s business cycle and are easily adjusted — ideal for seasonal industries with fluctuating sales, working capital requirements and cash flow.
Other key advantages include:
- Pricing is often on par with traditional cash flow loans. The idea that ABLs are costlier is outdated. While they were once priced higher due to riskier borrowers, ABL lenders now serve healthier borrowers, and the pricing for ABLs is similar to cash flow loans.
- Fewer covenants than cash flow loans. An ABL is typically governed by only a couple of covenant types, such as a fixed-charge coverage ratio covenant or a leverage ratio covenant, depending on the deal.
Collateral reporting and control of cash
Borrowers transitioning to ABLs must adapt to a few manageable changes:
- Provide more frequent collateral reporting, typically on a weekly, bi-weekly or monthly basis. At Hancock Whitney, we require monthly financials.
- ABL lenders require cash dominion. As cash receipts are collected, proceeds go directly to pay down the revolving loan balance. As the borrower requires cash to pay for goods and services or fund payroll, etc., it borrows against its line of credit.
Take full advantage of your balance sheet
A wide range of businesses use ABL financing. In 2024, wholesale and general manufacturing accounted for the secondlargest volume of ABLs nationwide, at $23.3 billion and $16.8 billion, respectively. Other sectors exceeding 5% of ABL volume included O&G, automotive and business services, according to London Stock Exchange Group Data & Analytics.
ABLs are valuable for middle-market businesses. While large corporations can tap capital market channels — including both traditional and institutional bank loans, junior capital, high-yield bonds and equity markets — middle-market counterparts often face limited options.
Before raising equity or costly junior capital, consider whether you are fully leveraging your balance sheet. If you need more liquidity and flexibility and can’t get it from a cash flow structure, an asset-based loan may be the answer.
For more information, visit hancockwhitney.com or call (770) 702-9769.
