Asset-based lending is a niche market finance tool and is a solution for a limited number of candidates. The lenders themselves who are more financiers than bankers tend to agree that the client groups they target are businesses that give rise to sell-and-forget debt.
This means asset-based lenders like to finance companies that sell their products but are not constricted by costly and time-consuming after-sales care, for example. With healthy levels of stock or raw product, companies raise finance against these assets. They also raise finance against their lists of debtors, at much higher rates than other lenders – including the cash flow approach – would be able to offer.
ABL allows for greater cash to collateral than banks. Typical percentages of finance raised against assets will largely depend on a case-by-case scenario. However, the following percentages give a general indication:
*about 80 per cent of receivables
*50 per cent to 60 per cent of inventory
*70 per cent to 80 per cent of liquidation value of machinery and equipment
*50 per cent to 75 per cent of the fair market value of real estate
*around 30 per cent to 50 per cent of the market value of patents and trademarks.
Lending is focused on the so-called old economy industries such as manufacturing, the timber and paper sectors, steel, distribution and some retail. Revolving credit facilities are typically established against a company’s stock and debtors over a three-to-five-year term. Also, additional term loan facilities are often signed with the security of prime commercial property, for example.