Recessions have a profound impact on businesses of all sizes. Sales and profits take a hit. Credit may be restricted and collections delayed.
Smaller companies face many of the same recession challenges as larger businesses, but their lack of size makes them more susceptible and increases the danger of failure in a downturn.
Lenders are well aware of this. As a result, they will be far less enthusiastic about extending credit to a firm with little cash reserves and capital assets that may serve as collateral during economic downturns. But it's not all doom and gloom.
Despite being cash-strapped, if your company is asset-rich—that is, if you own assets such as machinery, equipment, inventory, debits, or real estate—you may benefit significantly from asset-based financing or ABF.
Many businesses fail during an economic downturn because they lack working capital. Even if you are careful with your finances, it is unlikely that a commercial bank will give you a loan during challenging times.
This is why it's essential to start building relationships with non-bank lenders that offer asset-based financing as early as now, even if you don't need the money yet.
These lenders typically have less stringent requirements and can release funding much faster than a traditional bank.
This blog discusses how asset-based lending can serve as a lifeline for your business during difficult economic times.
Asset-based lending for commercial real estate are based on the estimated value of a business's existing assets, such as accounts receivables, equipment, inventory, commercial property, intellectual property, and brands.
When you take out asset-based financing, you are using the value of these hard assets as collateral rather than your cash flow.
You may be wondering: How is ABF different from commercial bank loans?
Traditional financing options tend to base their lending decisions on a business's historical and future cash flow and profitability.
In contrast, asset-based lenders look at the value of assets more likely to hold their value even during a poor financial performance.
In many ways, ABF is a better option than commercial bank cash-flow loans during a recession because it's more flexible, you can borrow more money, and the processing time is faster.
That said, lenders usually require periodic reports on the value of assets pledged to maintain those asset values.
The flexibility and accessibility of ABF make it an ideal option for businesses that need to raise working capital or improve liquidity as fast as possible.
It's relatively easy to find asset-based loans. Lender appetite for ABF has grown over the last several years, and they continue to adapt to meet the demands of their borrowers by offering flexible, innovative, and competitive loan solutions. The key to successful asset-based financing is to work with the right funding partner.
Here are some of the main reasons why ABF is a good option for businesses that wish to raise capital during a recession:
ABF is beneficial for lenders as well. After all, like business owners, lenders are also affected by recessions. They are just as concerned about getting payments as struggling companies are about paying their bills.
Moreover, asset-based loans give lenders the security of knowing there is always a valuable asset available to cover their risk, no matter how poorly the economy performs.
The Total Debt to EBITDA covenant is essential for cash flow financing. Unfortunately, this number can drop rapidly if performance falls, which becomes a big problem for the lender who relies heavily on this metric during underwriting.
In contrast, ABF lenders design their lending packages by analyzing a company's liquid assets and then formulating advances against its accounts receivable, equipment, real estate, or inventory.
Raising money for your business is difficult enough in times of economic expansion, and it becomes even more difficult during a downturn.
The good news is that there are options. Asset-based lending is one of the most promising solutions for businesses that need added working capital to survive—and even thrive—in an unpredictable market.
Asset-based financing is a proven strategy during recessions. If you need working cash but couldn't get it through a commercial cash-flow loan, ABF is undoubtedly worth exploring.
Many savvy business leaders looking for funding solutions during challenging times turn to asset-based financing because it is readily available and flexible.
ABF parameters don't deviate much, no matter how the market is doing, and can be set up to work for companies with slim profit margins or those going through tough times.
One key distinction between ABF and cash-flow financing is that covenant structures are often less demanding and easier to manage in case of a default. The lower cost of ABF also makes it ideal for businesses undergoing a period of distress.
Because most of ABF lenders' loans are collateralized and backed by assets with a lower risk profile, they can provide a less expensive alternative to higher-leverage debt packages based on cash flow—typically 150 to 200 basis points cheaper.
ABF closing fees are also much more reasonable. Indeed, asset-based financing allows borrowers and lenders to achieve their financial objectives and stay competitive during unstable economic times.
Capital Investors Direct is making it easier for commercial real estate (CRE) companies and investors of all sizes to access debt capital. We connect borrowers seeking asset-based financing to non-bank lending institutions specializing in commercial property loans.
Our team of expert loan specialists, advisors, and underwriters understand the unique challenges of being in the CRE business during a recession. That's why we go beyond just being a financial source.
We take time to understand your project and financing requirements so we can guide the process. Our asset-based financing solutions can be tailored to your particular case. If you're looking for asset-based lenders, we can help. Tell us about your funding requirements.
Then, simply fill out our application form and wait for our call. We will do everything we can to remove the stress from securing capital by designing a solid loan package for your next project.
