Asset-Based Lending in Capital Intensive Industries

Asset-Based Lending in Capital Intensive Industries

Capital-intensive enterprises that deal with heavy expenditures or substantial working capital outlays are increasingly turning to asset-based lending (ABL) to alleviate the pressure on their balance sheets. Employing assets such as inventory, accounts receivable, and equipment as collateral helps enable freight movers, heavy equipment manufacturers, fleet buyers, and auto dealers to secure funding while preserving resources for other financial goals.

Flavors of asset-based financing

Receivables-based financing: A lender works with the borrower to determine the quality of receivables (essentially their nominal value) as well as the amount of outstanding receivables against which they will lend. The percentage is known as the loan to value (LTV) ratio. Issues such as the days outstanding go into determining the LTV ratio.

Dealer financing: Automobile dealerships are a very capital-intensive endeavor both in terms of financing inventories of new and used cars and the amount of working capital needed to run a profitable dealership.

Dealerships, in particular, have a number of options to choose from:

  • Floor planning is a comprehensive financing solution that helps dealers manage inventory, interest expense and unit turnover more easily.
  • Consumer auto lending services can simplify customer financing.
  • Real estate financing may provide the capital necessary for dealer renovations and related projects to keep a dealership an inviting place for customers to shop.

The advantages of asset-based lending

For companies with tighter operating margins, asset-based lending can potentially allow for access to more capital than a traditional bank loan. It can also help with liquidity since the loan is based upon the assets being used for collateral versus the traditional emphasis on historical results.

In the same vein, the security for the lender offered by an asset-based loan can help companies lower their cost of capital because the terms typically have a lower interest rate on a loan than they might otherwise get.

If the company focus is on growth, asset-based lending can be a great way to finance opportunities such as an acquisition or launching a new product or service. To the extent that the cost of this type of loan is lower than other types of financing, and asset-based loan can be used to retire higher-cost debt that may be lingering on the balance sheet.

ABL also typically has fewer loan covenants and restrictions than other types of loans. This makes staying in compliance with the terms of the loan easier for borrowers.

If time is of the essence, an asset-based loan can be also helpful in that respect. An ABL is typically obtained more quickly than other types of bank loans due to the fact that the main issue for the bank is the quality of the assets that will be used as collateral. Assuming the business is profitable and has reasonable internal controls, the underwriting on these types of loan arrangements can be completed relatively quickly.

Making the decision

Asset-based lending can be a powerful tool for companies in capital-intensive industries because it diversifies your firm’s capital structure, frees up borrowing capacity for other purposes and can be a great source of working capital. Reach out to an asset-based lending specialist to discuss your unique financing needs and options.

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The views expressed by the author are not necessarily those of Fifth Third Bank and are solely the opinions of the author. This article is for informational purposes only. It does not constitute the rendering of legal, accounting, or other professional services by Fifth Third Bank, National Association or any of their subsidiaries or affiliates, and are provided without any warranty whatsoever. Deposit and credit products provided by Fifth Third Bank.