Maximizing Access to Capital in Asset-Based Lending

eCapital Corp

Last Modified : Jan 23, 2024

Fact-checked by: Bruce Sayer

As high-interest rates, low consumer demand, and declining economic indicators continue to challenge the financial health of SMBs across the nation, all eyes are on 2024. Consumer spending is projected to contract early in the year, but as inflation and interest rates abate, analysts anticipate consumption to resume expanding in the later half of the year. Businesses need the financial resilience to hold their ground and the agility to respond to growth opportunities when they arise. Maximizing access to capital is essential for near-term survival and long-term growth.

In today’s lending market, many SMBs have found access to capital through asset-based lending (ABL) arranged through alternative lenders. Because qualification for ABL is based on the business’s collateral value, rather than the condition of its balance sheet or the results of its profit and loss statements, ABL lenders can provide greater flexibility and liquidity than banks. However, as the credit market remains exceedingly tight, not all alternative lenders can deliver the extent of liquidity many clients need to meet all their obligations and objectives.

SMBs need to work with alternative lenders willing and able to provide maximum access to capital (excess availability) within the borrowing base to offer required working capital when needed. Lenders that are solution-focused when facing client’s need for increased access to capital are forward-thinking, creative, and apply innovation to maximize capital availability in asset-based lending.

Let’s explore maximizing access to capital by looking at a case example. Learn how a leading alternative lender was able to maximize “excess availability” to unlock more capital from an ABL facility to support their client’s 30% growth and build a more sustainable future.

What is excess availability in ABL financing?

In ABL financing, the lender advances funds based on the appraised value of the company’s assets, such as accounts receivable, inventory, equipment, or other tangible assets. The borrower can access capital up to a certain percentage of that appraised value. Capital availability is expressed as “excess availability” in ABL financing. It refers to the additional borrowing capacity a borrower has under their ABL credit facility. Although the basic formula for calculating excess availability is almost always the same, there are variations in elements that can be added or subtracted. Flexible alternative lenders with a solution focused approach and experience in the industries they serve have the expertise to leverage untapped asset resources to maximize access to capital.

Maximizing access to capital – a case in point

Pact is the fastest-growing organic cotton apparel brand in North America. In its early stage, Pact was generating 85 to 90% of revenues from wholesale distribution with limited success. But with a transition to a direct-to-consumer e-commerce platform, an elevated marketing approach, and fine-tuning their product mix, Pact shifted gears with impressive results. Growing 30% on the heels of COVID in 2022, Pact is now projecting to grow another 25 to 30% by the end of 2023.

Drew Cook, CFO of Pact, shares his thoughts and insights regarding the pivotal advantage of working with eCapital, a flexible financial provider and one of North America’s fastest-growing alternative lenders.

“eCapital is the fourth lender I’ve worked with during my time here at Pact, so we’ve had a fair amount of exposure within the ABL space. But where eCapital goes above and beyond what we typically see is their willingness and ability to provide additional availability within the borrowing base. This is exceptionally valuable to an e-commerce business like ours. They essentially enable us to access additional funds that are backed by scale. We received some additional liquidity to cover the working capital tied to credit card processing and the lag in receiving those funds.” Drew continued by stating the importance of this flexibility, “The additional financing in our eCapital borrowing base now makes up about 40% of the total loan structure. Our borrowing base is essentially 80 to 90% larger than what it would have been. In my opinion, this creative approach was super helpful given the way our business is structured and is also unique to eCapital.”

Transitioning to the right lender is essential to maximizing access to credit

In Pact’s experience, looking for an inventory based ABL solution within the bank space was very difficult. They found that banks had rigid lending standards, didn’t have much of an appreciation or interest in what unrealized growth could look like, and were far less inclined to help finance a growth business. For Pact, the solution is to work with a non-bank lender as a partner in business, not just a lender of money.

Drew elaborated, “The team at eCapital has been exceptional. They were very committed to getting to know our business and getting to understand what makes Pact unique. In fact, we just executed a renewal about a month ago. And with that renewal, we saw that eCapital was able to expand our overall availability. We’re able to work together to get an improvement in some of the borrowing base formulas and we’re also doing it at a cost that’s lower than what we were paying before.”

The relationship with eCapital has proven to be a game-changer for Pact. Drew continued, “The additional working capital provided by eCapital has been transformative for us. In today’s equity markets, growth businesses face challenges, and raising equity might not be the best option. By securing debt financing through eCapital, we’ve been able to continue our rapid growth without diluting our investors’ interests. I would say that the biggest win for us was the additional availability of capital that they were able to create, and avoiding raising equity during a time when it might be highly dilutive. This flexibility and support have been invaluable to our business.”

Choose a lender who invests in your future

The role of banks in leveraged lending has declined from about 80% in 2014 to under 10% of all leveraged loans in 2023. Meanwhile, alternative lenders are filling the credit gap. But choosing the right alternative lender is critical to the success of the funding arrangement.

Drew was specific when asked what advice he could offer to others seeking a lending partner, “Make sure you understand that it’s a relationship you should be building and not just money you’re taking. Look for a lender who understands your vision, appreciates unrealized growth potential, and aligns with your long-term goals.

Building a strong relationship from the bottom up and maintaining open communication is key to a successful partnership. Choose a lender who sees beyond the numbers and invests in your business’s future.”

Conclusion

As we enter the final quarter of 2023, the global economic situation remains highly uncertain – trends are difficult to predict, and a high degree of risk or unknowns are involved. Traditional lenders are highly cautious, contracting the credit market and limiting loan approvals mostly to established corporations with stable balance sheets. Alternative lenders are generally more willing to extend credit to SMBs, but many lack the resources or willingness to provide maximum access to the capital businesses need to meet all their obligations and objectives.

Amongst all this uncertainty, businesses need to maintain sustainability and be able to respond to growth opportunities when they arise. Maximizing access to credit is essential for near-term survival and long-term growth.

Follow the lead of business leaders, such as Drew Cook, CFO of Pact, who promotes the transformative power of working in partnership with an experienced and flexible alternative lender. The ability of a solution-focused lender to figure out how to leverage a company’s existing resources to maximize excess availability in an asset-based lending facility is a game-changer for undercapitalized SMBs. Choose a lender who sees beyond the numbers and invests in your business’s future.

“We feel like we have a true partner in eCapital, one who believes in our vision of where we want to take the business and helps us achieve our goals.” Drew Cook, CFO of Pact.

Editor’s Note: For a complete account of Pact’s sustainable success story, read eCapital’s interview with Drew Cook.

Key Takeaways

• Maximizing access to credit is essential for near-term survival and long-term growth.
• For SMBs operating with ABL financing, it is essential to work with an alternative lender willing and able to provide maximum access to capital within the borrowing base.
• To maximize access to capital, build a strong relationship with your lender. Work with a solution-focused lender as a partner in business, not just a lender of money.
• Look for a lender who understands your vision, appreciates unrealized growth potential, and aligns with your long-term goals.

eCapital Corp

eCapital Corp. is committed to supporting small and middle-market companies in the United States, Canada, and the UK by accelerating their access to capital through financial solutions like invoice factoring, factoring lines of credit, asset-based lending and equipment refinancing. Headquartered in Miami, Florida, eCapital is an innovative leader in providing flexible, customized cash flow to businesses. For more information about eCapital, visit eCapital.com.