Optimizing Your Balance Sheet: Leveraging Asset-Based Lending for Capital Efficiency

ABL provides funding by leveraging existing assets as collateral. The value of the assets pledged as collateral determines the amount a business can borrow. Typical assets include accounts receivables, inventory, equipment and, sometimes, real estate owned by the company. The most liquid assets are generally receivables and inventory, but additional hard assets can help to increase the borrowing limit.

Ideal for businesses with strong asset bases, ABL also works well for companies with fluctuating cash flow, strained profitability, or credit challenges that prevent them from accessing other funding. This is because an ABL facility is structured to review assets first – what a business has in hand right now – and then
cash flow. Banks, on the other hand, generally look first at cash flow and future performance.

Capital-efficiency solution

ABL is an effective, efficient way to generate and use capital. In effect, it monetizes balance sheet assets to increase liquidity. By putting those assets to work, ABL can help improve debt-to-equity and other financial metrics, which can, in turn, increase financial stability. Impacts of ABL financing that bolster both the balance sheet and overall business include:

• Growth capital. Companies can often obtain ABL funding faster and more easily than they can obtain unsecured loans or lines of credit. ABL also can offer lower interest rates than other types of loans. Strategic use of capital obtained through ABL can open doors to new markets, new product or service lines, staffing expansion and other growth initiatives. Plus, with ABL, you usually can obtain more funding than by financing strictly by using cash flow or earnings as a base.
• Smoother operations. ABL gives companies the cash they need to handle day-to-day expenses and operations, and manage ebbs and flows in business. This removes obstacles and can assist in maintaining clear focus on attention on growth initiatives.
• Flexibility. Working with a strong financing partner that understands your business and business model will afford flexibility in ABL terms. These could include the ability to adjust the borrowing base or thresholds, which can be very helpful for companies that routinely experience seasonal, industry or market variations. In addition, ABL lenders generally do not impose any restrictions on how a company uses the funds.
• Gap funding. For many businesses, the time between when they must make payments (for equipment, inventory or operational expenses) and when they receive revenue payments is significant. ABL can provide the funds to bridge this gap seamlessly and allow the company to maintain focus on its growth initiatives.
• Reduced reliance on equity financing. ABL may be able to reduce or eliminate a company’s need for equity financing. This strengthens the balance sheet and overall financial stability, which can make the company more attractive to investors and partners. Some companies use ABL to directly fund acquisitions; others find that ABL takes care of operational expenses so that other funds are available for acquisition strategies.

Balance sheet optimization

For companies with significant assets, ABL can be part of a balance sheet optimization strategy. Putting those assets to use as collateral opens the door to essential funding, improved cash flow and a better balance sheet.

Mitsubishi HC Capital America is a non-captive, non-bank commercial finance company that provides customized solutions to help organizations of all sizes accelerate growth. Our experts throughout North America are leaders in the innovative use of ABL. If you would like to find out more about how to optimize your balance sheet by leveraging ABL, contact us.