What is ABL - How to Select and Tailor an ABL Loan

Edward Irvin

Last Modified : Jun 05, 2024

Fact-checked by: Bruce Sayer

Credit is a vital tool that empowers businesses to manage an effective working capital solution and navigate economic challenges. However, the traditional lending market has increasingly tightened, leaving many companies needing alternative financing options to meet their capital needs. Asset-based lending (ABL) has emerged as a mainstream alternative, with its market size growing rapidly from $697.75 billion in 2023 to an anticipated $787.28 billion in 2024. As the popularity of this flexible financing option grows, more lenders are adding ABL financing to their list of product offerings. Business leaders searching for the best ABL loan to meet their liquidity challenges need a roadmap to navigate the expanding ABL landscape.

This article provides a guided tour through the process of selecting and tailoring the best ABL loan to meet the capital needs of SMBs in need of financial flexibility.

What is an ABL Loan?

An ABL loan is a form of business financing secured by a company’s assets such as accounts receivable, inventory, equipment, and sometimes real estate. Unlike traditional loans, ABL loans are based on the value of the assets used as collateral rather than solely on the borrower’s creditworthiness, making them suitable for companies with valuable assets but limited credit history. Typically structured as a line of credit, the amount a company can borrow fluctuates with the value of its assets, with terms and conditions tailored to align with the borrower’s circumstances.

Why choose an ABL loan for your business

Choosing the correct type of lending depends on factors such as your business’s financial situation, funding requirements, risk tolerance, and growth plans. SMBs should carefully evaluate their options and consider consulting with financial advisors or leading alternative lenders to determine the most suitable financing solution for their needs.

For SMBs with unencumbered assets seeking scalable funding options, an ABL loan offers one of the most option-rich financing solutions, providing a flexible line of credit with availability of up to $50 million.

How to select the best ABL loan for your business

Just as an F1 race car is the obvious choice for Grand Prix racing, for many SMBs, an ABL loan is the best vehicle for flexible business financing. When selecting the optimum ABL loan for your business, the real question is, “Who will drive the vehicle?” A reputable ABL lender experienced in your industry and dedicated to supporting your business’s financial health and growth is the best driver of financial flexibility for your business.

Shopping for an ABL loan requires careful consideration and thorough research to find a lender that offers the best terms, rates, and service for your company’s specific needs.

Here are steps to follow when shopping for an ABL loan:

1. Assess Financing Needs: Determine your business’s specific financing requirements, including the amount of capital needed, the purpose of the ABL loan, and the desired terms and structure. Consider factors such as working capital needs, growth initiatives, equipment purchases, or debt refinancing.
2. Research Lenders: Conduct thorough research to identify potential ABL lenders that offer tailored terms and services that align with your business’s needs. Explore online resources, industry publications, and professional networks to gather information about reputable lenders with a track record of success. Focus on lenders specializing in financing businesses similar to yours and narrow the list to a few. Discuss your financing needs with each potential lender to determine their capabilities and suitability.
3. Evaluate Eligibility Criteria: Identify the eligibility criteria of your short-listed lenders to ensure that your business meets their requirements. Consider factors such as revenue size, industry focus, collateral type, and creditworthiness.
4. Compare Terms and Rates: Request loan proposals from multiple ABL lenders and compare the terms, rates, and fees each offers. Pay close attention to factors such as interest rates, advance rates, repayment terms, loan fees, and collateral requirements. Evaluate the overall cost of borrowing and the flexibility of the ABL loan structure.
5. Consider Reputation and Experience: Evaluate the reputation and experience of each ABL lender by reviewing case studies, client testimonials, industry accolades, and regulatory filings. Look for lenders with a solid financial position, a proven track record of serving businesses in your industry, and a reputation for reliability and responsiveness.
6. Review Customer Service and Support: Assess each lender’s level of customer service and support provided. Consider factors such as accessibility, responsiveness, and the quality of communication throughout the ABL loan process. Choose a lender that prioritizes building long-term relationships and provides personalized guidance and support.
7. Seek References and Referrals: Ask for references and referrals from trusted advisors, colleagues, or industry peers with experience working with ABL lenders. Solicit feedback about their experiences with various lenders, including the application process, loan servicing, and overall satisfaction.

Terms to negotiate when tailoring an ABL loan

Once you’ve selected a lender to partner with, it’s time to negotiate the terms of the ABL loan to secure the most favorable terms and conditions. Be prepared to discuss your financing needs, collateral assets, risk profile, and growth plans to tailor the loan to your specific requirements.

Here are some essential terms to consider when negotiating an ABL loan:

1. Loan Amount: Determine the maximum borrowing capacity based on the value of eligible collateral, such as accounts receivable, inventory, and equipment. Negotiate for an ABL loan amount that aligns with your business’s financing requirements and growth objectives.
2. Advance Rate: Negotiate the percentage of the value of eligible collateral that the lender is willing to advance as a loan. Higher advance rates provide greater access to working capital but may come with stricter lending criteria or higher interest rates.
3. Interest Rate: Negotiate the interest rate on the ABL loan, which may be fixed or variable. Consider factors such as market conditions, your business’s creditworthiness, and the lender’s pricing model. Aim to secure competitive rates that minimize borrowing costs over the loan term.
4. Repayment Terms: Negotiate the repayment schedule, including the term of the ABL loan and the frequency of payments. Determine flexibility in adjusting repayment schedules based on your business’s cash flow and financial performance.
5. ABL Loan Fees: Negotiate any upfront fees, ongoing maintenance fees, or prepayment penalties associated with the ABL loan. Seek to minimize fees wherever possible to reduce the overall cost of borrowing and preserve cash flow for other business priorities.
6. Covenants: Discuss any financial or operational covenants required by the lender, such as minimum liquidity ratios, debt service coverage ratios, or inventory turnover requirements. Negotiate for reasonable and achievable covenants based on your business’s financial projections and industry norms.
7. Collateral Requirements: Clarify the specific assets that will serve as collateral for the loan and negotiate the valuation methodology used to determine their eligibility and value. Ensure collateral requirements align with your business’s asset base and financing needs.
8. Reporting and Monitoring: Agree on the reporting requirements and monitoring procedures that your business must adhere to throughout the term of the ABL loan. Negotiate for streamlined reporting processes that minimize administrative burden while giving the lender sufficient visibility into your business’s financial performance.
9. Default Provisions: Review the default provisions of the ABL loan agreement, including the events of default and the remedies available to the lender in the event of default. Negotiate for reasonable cure periods and remedies that allow your business to address potential issues before triggering a default.
10. Exit Strategy: Discuss potential exit strategies for the ABL loan, such as refinancing options, early repayment provisions, or extension possibilities. Negotiate for flexibility in managing the loan term and exploring alternative financing options as your business evolves.

By carefully negotiating these terms, businesses can customize an ABL loan that meets their financing needs, provides flexibility for growth, and minimizes borrowing costs and risks. It’s essential to work closely with experienced legal counsel and financial advisors throughout the negotiation process to ensure that the loan agreement terms are fair, transparent, and aligned with your business’s long-term objectives.

Finalizing the ABL Loan Agreement

After reaching an agreement with the chosen lender, finalize the loan documentation and complete the necessary paperwork to formalize the ABL loan arrangement. Ensure that all terms and conditions are clearly outlined in the loan agreement and that both parties understand their rights and obligations.

Conclusion

By following these steps, businesses can effectively shop for an ABL loan and secure financing that meets their needs, supports their growth objectives, and provides the flexibility and reliability required for long-term success.

Key Takeaways

• As the popularity of ABL loans grows as a mainstream business financing option for SMBs, more lenders are adding ABL financing to their list of product offerings.
• Business leaders searching for the best ABL loan to meet their liquidity challenges need a roadmap to navigate the expanding ABL landscape.
• This article provides steps to follow when shopping for an ABL loan, offering the best terms, rates, and service for your company’s specific needs.

Edward Irvin

Edward is a seasoned finance professional with over 25 years of experience in asset-based lending, factoring, equipment lease financing, and commercial real estate financing. He is a skilled negotiator with a deep understanding of underwriting and documentation. Edward is a problem-solver and critical thinker with a proven track record in due diligence for various financing solutions.

Prior to joining eCapital, Edward held leadership positions as a Managing Director at Webster Bank, Sterling National Bank, and Capital Finance. He also played a key role in building the factoring arm of BBVA prior to its acquisition. Edward holds a Bachelor of Science in Business Finance from Iowa State University.