Accounts Receivable: ABL Revolvers

• An asset-based lending (ABL) loan secured by accounts receivable is the most traditional ABL credit. The lender advances from 70 to 85 percent against each of the borrower's approved invoices. When a customer makes payment, the incoming funds are captured in a lock box controlled by the lender. The lender uses the collections to pay down the previous advances, and either returns the additional monies to the borrower, or develops "availability", which is unused borrowing capacity.
  
  

Inventory Loans: Becoming Conservative

• ABL loans against inventory grew in popularity during the late 1980s and into the 1990s, as lenders offered these advances prior to sale of a manufacturer's or distributor's products. In the 2005+ environment, lenders have been a bit more conservative with inventory advances. In general most inventory advances are at moderate levels; for example 45 percent against a readily marketable raw material. In practice, the inventory advances are repaid via a formula set by the lender that in essence curtails part of an accounts receivable advance and uses borrowing power to repay the inventory advance. This practice is referred to as rotating the inventory loan.
  
  

Equipment: Term Debt With Controls

• An ABL credit extension against equipment will be the least likely loan product that a customer can acquire. Current valuation environments for many large fixed assets classes are depressed. Moreover, in the event of a liquidation, the costs of disposal may be burdensome. In the event that a lender declines to make term credit available, borrowers may want to consider other hybrid alternatives, such as a sale leaseback of specific high-value assets.
  
  

Documentation and Controls

• Depending on the perceived risk of the individual credit or based on the approach of particular lenders' operations, the level of documentation and controls over an ABL loan can vary. In almost all cases, the lender will record some kind of security interest appropriate for the given collateral. In addition, controls may vary; one lender might require copies of all invoices; another lender (in some cases factors) might require originals, and subsequently send them to the customer after a ledgering activity. In the case of inventory and equipment loans, the lender might require a prefunding appraisal of the respective collateral. The borrower is usually required to pay or reimburse these fees, which can be moderately large depending on the volume or complexity of the collateral.
  
  

Considerations

• A borrower who takes a loan against its accounts receivable should expect that incoming cash collections will be swept by the lender via a lock box to pay down advances. Asset-based loans can often provide liquidity and operating capital that a small business needs. Going into the ABL relationship with an informed mindset will pay dividends later.