Businesses are contending with rising rates, tighter lending standards and a potential recession, but that doesn’t mean they’re putting growth on the back burner.
“Even though the economy is facing some uncertainty, most of our clients are still interested in growing their businesses. Asset-based lending is a great approach to accomplish that in this environment,” said Bill Sullivan, Colorado market president and CEO for BOK Financial®.
Unlike conventional lending, which is primarily based on a business’s cash flows, ABL provides a revolving line of credit based on the borrower’s working capital assets, such as their inventory.
Cash flow is still important with ABL, but the focus on assets, rather than cash flow, means that lenders can be more flexible and understanding than they can with conventional loans, said Ryan Birnel, BOK Financial’s director of asset based lending.
His team generally works with commercial lending deals of $5 million or more—which is typically outside the range for SBA loans, leaving ABL and conventional loans as the two options.
“With ABL, versus conventional loans, lenders have a much better and broader ability to handle ups and downs with clients.”- Ryan Birnel, BOK Financial’s director of asset-based lending
“Business operators know that if they see themselves moving into a challenging period, we’re a much more comfortable ally when the waters get a little choppier. For instance, we tend to be more patient if our borrowers have a couple quarters of negative performance,” he said.
When providing ABL, a lender has to closely track the assets that come in and out of a business to support the borrowing base, and also keep track of the cash that the business receives from its customers, Birnel noted. This allows businesses to borrow the funds they need even at a time when their cash flow may be tight.
Due to this greater flexibility, interest in ABL has spiked in the last few years, as business operators have dealt with inflation, the tight labor market, supply chain issues and uncertainty in the broader economy, Birnel said.
Meanwhile, bank lending standards have generally tightened this year, which has made it more difficult for some businesses dealing with cash flow issues and other uncertainty to get conventional loans. Consequently, some banks are using ABL for these commercial deals.
“Yesterday’s conventional cash flow deal is today’s ABL deal,” Birnel said.
“With ABL, businesses still get access to ample liquidity, and they get substantial flexibility at the same time. Meanwhile, pricing is generally similar to a conventional loan, if not unchanged,” Sullivan explained.
No longer just for businesses in distress
Despite ABL’s growing popularity, some people have the misconception that it’s just for businesses in trouble, but that’s not the case, Birnel said. This idea stems from ABL’s roots in the 1980s and ’90s, when ABL was primarily used for distressed borrowers.
Today, this lending approach appeals to a much broader subset of companies, which tend to be fall into three categories:
- High-growth businesses: These are companies whose focus is more on growth than bottom-line profitability. Many of these businesses are private equity- or investor-owned, with a three- to seven-year growth strategy.
- Distress, turnaround or restructure scenarios: Although this type of business is no longer the sole user of ABL, businesses in trouble still do use ABL.
- Working capital asset intensive businesses: Companies that have a great deal of receivables or inventory—or even heavy equipment—are a great fit for ABL, according to Birnel. This category includes wholesale distribution businesses or manufacturers, such as multi-state plumbing supply companies or food service distribution companies.
Meanwhile, for some businesses, conventional loans may still be the better option, even in today’s economic environment, Sullivan added. “A very stable company that has a lot of predictability is going to fit well with the conventional cash flow path of lending, but for everybody else, ABL needs to be at least discussed.”