Prime candidates for ABL are asset-rich companies that may have variations in cash flow but need significant capital to help them operate and grow. That description could apply to a broad range of businesses.
Many companies deal with ups and downs as part of normal operations. Suppose, for example, that your company manufactures commercial truck trailers. When the economy stalls, demand for many goods is likely to fall, bringing down freight hauling volume and reducing orders for new trailers. Moreover, truck tractors typically have to be replaced more often than trailers, and trucking firms may opt to use their capital expenditure budgets to purchase tractors before costly new fuel efficiency regulations go into effect, for example. Yet despite fluctuations in cash flow, you need capital to weather dips in volume and to be able to expand and modernize production—and you have sufficient assets to qualify for a sizeable ABL line of credit.
Distribution businesses are another good candidate for ABL. If your company is a wine and liquor wholesaler, for example, it will likely experience seasonal fluctuations in sales. Yet you may need to stock up in advance of summer and winter holidays, and there could be a gap between when payments are due to your suppliers and when you turn the inventory and are able to collect from the bars, restaurants and liquor stores you supply. Having a line of credit to draw upon could give you needed flexibility.
Retailers that have significant inventory but earnings volatility may also benefit from ABL. That was the case during the early months of the pandemic, when a national shutdown suddenly shuttered clothing chains and other retailers. Some were able to use ABL to fund operations and enhancements to their online presence, and an ABL facility provided greater liquidity than their existing cashflow financing.
For these and other kinds of companies, ABL may bring a particularly welcome bonus. You often can draw upon your line of credit without seeking a lender’s permission. For example, if you want to make an acquisition, enter a joint venture or declare a dividend, you would have the flexibility to deploy the capital quickly without prior approval as long as you meet certain payment conditions.