Adapting to Economic Uncertainty: The Role of Asset-Based Lending in 2024
In today's dynamic business landscape, companies continue to encounter challenges that impact their performance and growth.
As we move through 2024, businesses are reassessing their financial needs and seeking both innovative and time-tested solutions to fuel their operations in an uncertain economy.
Traditional lending routes have become less certain, particularly with the tightening of lending criteria by many banks. Forecasting future performance has become increasingly challenging, making it harder for businesses to secure low-interest rate loans based on cash flow projections alone.
Focus on assets versus cash flow
Asset-based lending (ABL) offers a compelling alternative by focusing on the evaluation of current assets rather than future cash flow forecasts. By prioritizing assets such as inventory and receivables, ABL provides flexibility in underwriting and credit structure, allowing businesses to leverage their existing assets for financing.
ABL enables businesses to obtain loans based on a higher percentage of their assets compared to traditional bank loans, providing additional capital essential for navigating and growing in today's uncertain economic climate.
What we’re seeing in the market
At Mitsubishi HC Capital America, we've observed a significant interest in ABL from companies of all revenue sizes with substantial inventory, receivables and equipment. These businesses are seeking capital to fuel their growth and require financing options that recognize the value of their assets to support their immediate needs.
Our ABL clients span various industries and sizes, with lines of credit tailored to their specific requirements. Our current ABL clients have sales of $10 million to $2 billion, with lines of credit from $2 million to $25 million and beyond. The range of use cases is broad. Here, consider just a few.
- Increase in sales. A large staffing company increased sales by more than $5 million with ABL. We were able to more than double the company’s borrowing capability – from $1 million it could get with a bank loan to $2.5 million with ABL. That capital infusion converted to an additional $5 million in sales.
- Bridging a cash flow gap. A current client and distributor of auto parts requested a temporary increase in overall credit limit because they were experiencing difficulties due to chip shortages, an unexpected drop in accounts receivable, and supply chain issues that impacted lead time to secure products. Instead of inventory receipt in 45-65 days, the timeframe extended to 90-150 days. With the delays, they faced cash-flow shortages due to the buildup of excess inventory.
After reviewing the client's history with us, as well as recent field exams, we provided a temporary increase to their line of credit. By stretching on inventory advances and being flexible on terms, we could help the client immediately address short-term needs.
- New jobs. An industrial manufacturer financed the cost of launching projects that generated a substantial number of jobs and renovated a large facility with ABL funds. When traditional lenders said “no,” we used the company’s accounts receivables and inventory as collateral to help them realize this opportunity.
In a world where accurate forecasting is challenging, ABL emerges as a smart financial move for businesses with solid assets and significant growth potential.