Asset-Based Lending in Uncertain Times

Companies seeking working capital today are turning to asset-based lending to facilitate their business strategies. Many are finding that an asset-based structure provides the liquidity and flexibility necessary to quickly execute a buyout or facilitate a turnaround plan in today’s unpredictable economy. Here are some tips and tactics.


Asset-based financing is often the best option for companies with higher risk profiles. In the past this meant that asset based lenders were extending credit to businesses experiencing rapid growth, conducting leveraged buyouts or whose profits were seasonal.

In today’s economy, however, asset based financing has become more prevalent for companies facing new challenges, have a leveraged balance sheet or maintain collateral in several different places. Lenders are more comfortable making a loan when they know there are assets available — accounts receivable, inventory, machinery and equipment, and real estate — if sales and cash flows move unpredictably.


Traditionally, banks assess transactions by a strict debt-to-worth ratio and several other covenants due to internal constraints and federal regulations. During times like these, they become even more cautious.  Asset-based lending is usually not subject to these strict limitations because lenders place a greater emphasis on accounts receivable and inventory. The lender determines the value of these assets as the result of a thorough due diligence process. As part of this process, the lender analyzes a company’s books and records, including accounts receivable and inventory, and appraises fixed assets such as machinery, equipment and real estate. In addition, they may conduct a site visit to see a prospective borrower’s inventory first-hand and meet with senior management. The lender is then able to assess a company’s value, weighing qualitative as well as quantitative factors, and feels more at ease about lending to a highly leveraged or otherwise challenged company.


The fundamentals of lending don’t fluctuate with market conditions for most asset-based lenders serving middle-market companies. As I already mentioned, the quality of the company’s collateral is paramount, but lenders do take other factors into account. Here are just a few of the things you or your company’s CFO may want to keep in mind to help the process along:

• Maintain detailed accounting data.

• Implement good collateral controls.

• Keep audited financial statements versus compiled or reviewed statements.

• Have a strong senior management team in place.

• Establish good communication with your lender.

• Keep your lender up-to-date on your company’s performance.

• Develop an understanding of your lender’s current lending strategies.

• Meet with your lender regularly to provide business updates and address potential problems or concerns early.

No one knows what the future will bring, but it’s clear that liquidity will likely remain a challenge.

Although structures may be tighter and pricing may be higher, asset-based financing is relatively stable and will be considered a viable alternative to traditional loans now and in the future.

Source: PNC