It was an unconventional option, but for Tender Belly it turned out to be a winning move.
In February 2020, just before the pandemic changed everything, Denver-based Tender Belly was poised to make a change. They were selling premium bacon and pork products directly to restaurants and through food service distributors that supply restaurants. Fortuitously, they had already made the decision to expand into retail channels (grocery stores and warehouse clubs) just as COVID-19 arrived on scene and rocked the food service industry.
Under the circumstances, Tender Belly wasn’t an ideal candidate for a traditional business loan. Instead, the company turned to asset based lending, a different method of extending credit to businesses based on the value of their assets.
“They wanted to make a change and were already in talks with clubs and grocery chains, but they hadn’t made it yet when the pandemic knocked the wind out of them,” said Ryan Birnel, director of Asset Based Lending (ABL) for BOK Financial®. “ABL allowed them to access the capital they needed so they could change revenue channels quickly and take advantage of retail tailwinds,” he said.
There have always been banks lending money to businesses of all sizes, said Birnel. “For the longest time, it’s been done with an eye toward the ability to repay the loans using the company’s cash flow, or profitability.”
In the current economic climate, asset based lending turned out to be the perfect fit for Tender Belly.
“Because of our focus on a client’s assets rather than performance, we actually provide a lot more flexibility,” Birnel said. “They don’t have to make management decisions based on what it’s going to mean for their bank relationship. That’s helpful right now because there’s less predictability for business owners than in normal times.”
How does it work?
For example, a regional plumbing supply distributor has warehouses full of goods and receivables (invoices) that are owed to them.
Those two categories—receivables and inventory—make up the collateral used to secure credit.
The ABL structure harnesses the company’s assets as collateral and unlocks needed availability for businesses that may be approaching challenges and may need to make changes, or may have unique opportunities.
Tender Belly is the perfect example of this funding option working well, he said.
When the pandemic hit, people stopped eating out and started eating at home, Birnel said. “Tender Belly could have been in trouble without the ability to rapidly redirect their focus toward selling their products to the grocery and club space. And we helped them through that by providing access to capital to fill large orders from major club and national retailers. They knew they needed to pivot. They just needed the capital to do so.”
Asset based lending works for companies that are more dynamic, growing and changing.
What it’s not
Asset based lending was once used exclusively in times of distress, turnaround and restructure, which earned it a less-than-positive reputation.
ABL has come a long way since then and today, it’s more a matter of choice and strategy, providing flexibility and maximizing capital in certain situations, he said.
“ABL gets more traction with companies that are trying to execute on some sort of growth strategy rather than companies focused on just sustaining,” he said.
The cost of asset based lending is about the same as conventional credit, but there are some additional administrative requirements for borrowers.
“The way we do business is by taking a close focus on collateral values, which change daily or even hourly, requiring our borrowers to do a higher amount of reporting,” Birnel said.