In your search for commercial financing in the midst of the ongoing credit crunch, here’s something to consider: an ABLOC (asset based operating line of credit) facility may be the way to go.
It’s unfortunate that, for whatever reason, asset-based lending has gotten a bad rap. A lot of the myths about asset-based lending simply aren’t true – for example, that it is too expensive to be considered a viable commercial financing option for the average small business. In truth, asset-based lending can make the difference between success or failure for companies operating without adequate working capital – at a cost that’s probably a lot less than most business owners think.
How Asset Based Lending Works
With an ABLOC a company uploads their invoices into a professional management system and then can borrow up to 85% of the eligible receivables amount when needed. Unlike Factoring, this allows a business to “age” a receivable until they really need the money (payroll and payables). This is much more flexible than Factoring and can significantly lower the amount of interest that’s paid. A borrower can expect to pay anywhere from 3 to 6% above prime on the money they borrow.
There is also a collateral management fee or discount — typically between .5% and 1% of the average outstanding balance of A/R on a monthly basis. This pays for the costs of performing credit checks on customers, analyzing credit reports to uncover risks and helping to manage appropriate credit limits. A follow-up service may also be offered to help keep debtors paying more promptly all of which can be done on a non-notification basis
One thing to note is that ABL lenders need to be more insightful about the inner workings of their client’s business than traditional lenders are. Since they are lending against their client’s outstanding receivables, it’s their job to know all about the client’s customers, terms, backup and the billing process itself. Lenders need to possess an in-depth understanding of their clients’ industries and the business nuances between their clients and the clients’ customers.
An ABLOC Success Story
An industrial service business in Philadelphia recently entered into an asset-based LOC arrangement with a well-established lender because it was in need of short-term working capital assistance and decided on an ABLOC arrangement instead of a traditional line of credit.
Since the business’ customers are of high credit quality, this strategy was a logical credit facility for them to turn to. The business has been using an ABLOC for several months now and is extremely pleased with the arrangement.
The owner especially likes the fact that he can use the lender’s company’s online system to determine how much money he can borrow through the facility at any time, 24/7. This is a big help when it comes to daily cash flow and working capital planning.
Items for Success
Here are a few areas you should concentrate on in order to increase your chances for asset-based lending success:
- Financial statements, management reports and forecasts: It is important to generate accurate and timely financial statements, as well as for the owner to know exactly where the business is financially at all times — and where it’s headed. By accurately tracking fees, the business is better able to build in and earn back those fees. Value will be gained via an increase in gross sales, discounts for paying vendors early and overhead reduction. Asset based lending will look expensive unless it is properly measured against the value it brings.
- The contract: Be sure that you understand all details in any contract you sign with a lender, as well as the fees you will be charged. Beware of lenders who issue a term sheet without doing proper due diligence. What may appear to be a low rate at the outset could end up being very expensive when things like lockbox, minimum usage, credit checking, and wire transfer fees are included.
- Monitoring of facility and working capital: Make sure that a senior financial person on your staff has sufficient time to monitor usage of the facility and working capital-oriented items. By borrowing only what you absolutely need, you will be able to minimize your expense. It’s also important to monitor the aging reports and become involved if any trade or payment disputes arise.
- Maximum efficiency: Increasing efficiencies in your backroom operation can have significant positive implications on your bottom line. By understanding all the services that your lender performs, you will be able to better utilize your staff and your own time. Understanding the reports and implementing controls and procedures will minimize errors and increase efficiency.
- Open communication: It’s important to have a clear channel of communication with your lender. You might be surprised at the flexibility your lender (and others) will provide when you are open and honest with them. It’s also important that you communicate directly with the lender if you are aware of any issues or problems with your invoicing or customers. A good lender can deal with most issues if aware of them – but like most lenders, they don’t like to be surprised.
Since an asset-based lender will become an integral part of your business team, it’s important to select your partner carefully. Professional experience and adequate capitalization are especially crucial. Don’t be fooled by Internet claims of very low rates and a “24 hour application process.” Good lenders are as choosy about their clients as you should be about your financial partner. When everyone performs their proper due diligence, you are more likely to build a foundation for a positive relationship for many years to come.
Tom Klausen is the Senior Vice President of First Vancouver Finance (FVF), which has offices in Vancouver, BC and Toronto, ON. FVF provides traditional lending solutions in a fintech world, to small and medium-sized businesses. Tom has worked in this space for more than 25 years and consults with businesses struggling to obtain traditional financing. You can reach him at TKlausen@FVF.ca or visit http://www.FVF.ca.Vincent Leusner of Profit Focus CFO, LLC assists companies that are facing complex financial and strategic issues and are in need of senior financial talent on an as-needed basis. The best CFOs, even a fractional or as-needed one, keep an eye on the whole company, not just the bottom line. Vince’s job is supporting a client’s entire organization, including sales, marketing, production, operations, staffing and other relationships, both internal and external. Contact Vince.