Have You Considered Using Asset-Based Lending to Grow Your Business?
Growing a business is exciting, but you’re bound to hit a few bumps along the way. One common glitch is a lack of cash on hand to bridge the gap between payouts and invoice collection. An asset-based line of credit (ABL) is a powerful tool designed to manage the lag between accounts paid and accounts received. The cash infusion it provides can help you maintain production—and grow your business.
How can an ABL credit line help support my business?
As far as cashflow solutions are concerned, an ABL is a remarkably flexible tool that can fluctuate with the business owner’s needs. It’s designed to prevent borrowers from overleveraging themselves and keep their working capital debt at an appropriate level. The line of credit shifts up and down based on a business’s receivables and inventory and changes with the needs of the borrower.
For example, let’s say your enterprise is among the many businesses whose cash flow was disrupted recently by shipping bottlenecks and ongoing supply chain issues. These shipping delays likely impact your business’s ability to receive the raw materials required to manufacture your products, stock up on inventory, get your product to market, or in the hands of your end-user. An ABL line of credit can provide a cash infusion to pay off outstanding invoices while waiting for inventory to arrive or products to make it onto shelves.
Another common example involves starting an account with a new supplier while building or maintaining a manufacturing business. Because the relationship is brand new, the supplier may request the full balance upfront rather than agree to payment terms right away. This might pose a cash flow problem for new businesses: the enterprise can’t go without the supplier’s products or services that allow it to function—but it may be unable to pay an invoice until it collects on outstanding invoices of its own. This is the perfect opportunity for that manufacturer to take advantage of an ABL. By leveraging the company’s existing inventory and receivables, it can fulfill the operation’s short-term cash demands—and expand the business in the process.
Supplies demanding cash up front and shipping delays are only a few of the many scenarios that can affect the time between when our borrowers pay out cash and the time they receive it back—also known as the “cash cycle.” It is also affected by long lead times on inventory, a lengthy manufacturing process, and extended payment terms demanded by the end-user. First American Bank’s ability to understand, analyze, and adjust for those factors within a unique business is critical.
What is an ABL?
Here’s how it works: When a business is in need of a cash infusion, a lender like First American Bank can offer a revolving line of credit using the company’s short term working capital assets as collateral. These assets primarily include accounts receivable and inventory, among others. Small businesses commonly use ABL loans but larger enterprises take advantage of them as well. As such, these lines of credit span a broad range, starting at around $500,000 to $1 million dollars and scaling up to the $30 to $50 million dollar range.
The beauty of the ABL is its built-in safety net. Because the credit line shifts up and down in accordance with the borrower’s receivables and inventory, the business owner is restricted from borrowing more than is prudent.
Consider one First American Bank customer who opened a $500,000 ABL credit line while looking to increase their sales. Over the course of eight years, that line of credit has scaled up to $25 million dollars, commensurate with the company’s growth. By taking advantage of their existing asset base, they were able to extend credit terms to their customers, grow their business exponentially, and scale their borrowing power.
What do you need to do to secure an ABL credit line?
In order to apply for an ABL loan, business owners must submit bank statements, balance sheets, inventory, accounts receivable and payable reports on a monthly basis. New ABL customers typically undergo a field exam where the bank examiner visits the borrower’s place of business, reviews the books, and conducts asset-value tests.
For business owners, the level of reporting involved in using and maintaining an ABL line of credit adds some work, but ultimately frees up cash. Working with a trusted partner like First American Bank ensures the process goes smoothly. The customer can also expect detailed guidance from their senior-level lender.
The process of gathering financial documentation has significant and long-lasting benefits. It can help you stay organized, discover areas of improvement in your budget, and spot potential growth opportunities. In short, the reporting required to obtain and secure an ABL helps maintain checks and balances within your enterprise. With more transparency comes greater clarity.
Why open an ABL line of credit with First American Bank?
When opening an ABL line of credit with First American Bank, you’re beginning a relationship with a trusted advisor who is available to answer your questions and craft solutions based on your individual needs. We encourage our clients to engage in an ongoing conversation about the lending process. As your needs change your experienced advisor will adjust your line of credit accordingly. You communicate your vision for the future of your business. We’ll help you grow it consistently and carefully.
A secure line of credit can help you expand your business — and give you greater peace of mind.
