Asset-based lenders offer creative business financing solutions to companies that don’t qualify for traditional bank loans and credit lines due to their startup status, rapid growth, or financial ratios that don’t measure up to a traditional bank’s requirements. Asset-based loans are secured by a wide variety of assets. An asset-based loan is typically structured as a revolving line of credit without a scheduled repayment and on an interest-only basis. The lender advances funds based on a percentage of the accounts receivable (normally 70-85 percent) and inventory (0-60 percent) and, when such assets convert to cash, the advances are repaid accordingly.
Asset-based loans against equipment and real estate are often made in the form of term loans that include regular periodic payments of both principal and interest in order to retire the debt at a fixed maturity date. Asset-based loans using real estate as collateral have longer maturities than equipment loans because of the generally shorter economic life expectancy of equipment.
Companies in an array of industries and at varying stages of their lifecycles use asset-based loans for a multitude of reasons including mergers and acquisitions, debt refinancing, capital expenditures, working capital, leverage buyouts and even employee stock ownership programs. Asset-based loans offer flexible financing solutions for the following uses:
• Working Capital: The assets available to apply to a business' operations are considered working capital assets. At times, working capital loans are needed to bridge financial gaps during the lifecycle of a business. Working capital loans can be secured by a variety of asset types, including accounts receivable, inventory, equipment, and/or real estate.
• Growth: Typically, as a company grows so does its need for financing. As a company's collateral grows, its assets can strengthen its ability to borrow. An experienced and creative asset-based lender can assemble a credit facility that can scale to grow with a company.
• Acquisition: To grow a business, a company may look to acquire a strategic partner or even a competitor. Asset-based financing is often an efficient means to obtain funding for business acquisitions.
• Turnaround Financing: Turnaround financing is often used by under-performing businesses that are not achieving their full potential. In some cases, it is used for businesses that are either insolvent or on their way to becoming insolvent. Asset-based lenders are accustomed to the bankruptcy process and asset-based financing is ideal for turnarounds because of its flexibility.
• Refinancing/Restructuring: When a company enters or exits a growth stage, refinancing or restructured financing may be key to creating a capital structure that better meets the needs of the company. This type of financing is often used for market expansion, completing an acquisition, restructuring operations, or following a successful corporate turnaround.
• Debtor-in-Possession (DIP) Financing: Debtor-in-possession (DIP) refers to a company that has filed for protection under Chapter XI of the Federal Bankruptcy Code and has been permitted by the bankruptcy court to continue its operations to implement a formal reorganization. A DIP company can still obtain loans, but only with bankruptcy court approval. Asset-based lenders also provide exit financing or confirmation financing to companies coming out of bankruptcy.
• Buyout: A buyout is the purchase of a controlling percentage of a company's stock. In a leveraged buyout (LBO), the acquiring company uses the minimum amount of equity to purchase the target company. The target company's assets are used as collateral for debt, and its cash flow is used to retire debt accrued by the buyer to acquire the company. A management buyout (MBO) is an LBO led by the existing management of a company. Most LBOs are also MBOs.
• Leveraged ESOP (Employee Stock Ownership Plan): A leveraged ESOP is one of many corporate finance alternatives that provide significant tax incentives to both business owners (potential deferral of capital gains) and ESOP Companies (potential exemption from federal income taxes). ESOPs can be used not only to finance stock purchases from existing shareholders, but also to facilitate corporate transactions such as management buyouts, acquisitions and divestitures.