Asset Based Loans – Counter Cyclical Liquidity Enhancement

Posted on: October 6th, 2021

asset based loans

All businesses go through cycles which require various levels of investment along their growth journey. Starting out, businesses need venture capital to build the product and attain market validation. Once proven, businesses need growth equity or growth debt to jumpstart their commercialization roll out.

As the business continues to expand, more scale-up capital in the form of debt or equity is used to diversify the product line and market. Along this classical growth path, there are interruptions caused by the macroeconomy which slow or even halt growth, despite a Company’s best efforts. The profit trend may turn red, making it difficult to raise capital based on the strength of the Company’s historical performance. As the Company becomes loss-making, pressure builds on its balance sheet, eroding its current assets and ballooning its payables.

Most companies try to ride out this cycle, yet the longer it goes, the greater the potential harm. A smarter, more enlightened approach is to directly address the capital shortfall by using an asset-based loan, as a counter cyclical form of liquidity enhancement. Most companies see loans such as asset-based loans in a pro-cyclical manner, used only when business is strong. Asset based loans certainly add value in accelerating a company’s growth, but they bring even more value in buffering a company’s liquidity and breaking the cycle of deceleration. Asset based loan proceeds have big impact in helping to reverse a company’s downtrend through remedying capital shortfalls and enabling the company to reliquefy.

Asset based loans are made, as the name implies, against the assets, and are available from lenders with special understanding of the collateral value. Even through your business trend is down, the collateral value of your assets is not necessarily impacted. If your business is not in a state of near-term insolvency, asset-based loans are available to serve as a bridge over troubled waters. They can be used to repay old bills, buy more product, or gap fund any other budget areas. Capital infusions have their greatest impact when calibrated with the right timing. Using asset-based loans to address working capital weakness is a strong counter-cyclical, liquidity enhancing maneuver

In the acquisition financing arena, capital availability is destiny as companies require reliable access to capital to grow over the long term. Unforeseen capital needs usually arise when acquirers least expect it. This can cause some concern for the acquisition financing provider, especially when covenants tighten up and that working capital availability is utilized faster than expected.

Mezzanine debt borrowing is usually a straightforward activity that many companies use for funding of transitional growth. Mezzanine debt lenders are highly transparent about their due diligence approach and their post-closing loan management making it easy for companies to engage with.

Elections have consequences and positive ones at that for the acquisition financing middle market. While much media attention is paid to the direction of the yield curve and the Fed’s likely rate cuts, scant attention is paid to the more important drivers of the acquisition financing market – business psychology and regulatory climate.