Ensuring Your Clients Are Bank-Ready for Asset-Based Lending (ABL): An Interview with TAB Bank

Asset-based lending (ABL) offers businesses an excellent avenue to unlock capital using their tangible assets. However, the underwriting process can become lengthy and frustrating to clients if they are not properly prepared going into the application. Brokers, consultants, and advisors can expedite the process and minimize administrative headaches by helping clients to understand "bank-ready" requirements as soon as a financial need is anticipated. We spoke with Curtis Sutherland, Head of Sales and Business Development at TAB Bank and a seasoned expert in ABL financing, to better understand what clients need to be ready for an asset-based loan.

Q: What exactly is asset-based lending (ABL)?

A: Asset-based lending is a financing method that allows businesses to leverage tangible assets—such as accounts receivable (A/R), inventory, and equipment—as collateral. Unlike traditional loans that heavily weigh credit history, ABL primarily considers the value and marketability of these assets.

Q: What are the main things TAB Bank evaluates when underwriting an ABL deal?

A: We look at several key areas:

• Eligible Collateral: We assess the quality, age, and marketability of accounts receivable, inventory valuation, and equipment.

• Borrowing Base Calculation: We determine how much a business can borrow based on eligible collateral, typically calculated by multiplying eligible invoices by an advance rate.

• Risk Factors: We evaluate risks such as customer concentration (particularly if any customer represents more than 25% of A/R) and the age of invoices, focusing on those less than 90 days old.

Q: Why is financial record-keeping so important in the ABL approval process?

A: Accurate financial record-keeping is crucial because it directly impacts the borrowing base calculation and the assessment of collateral eligibility. Clients must maintain detailed accounts receivable records, perform regular customer concentration analyses, and ensure timely updates to receivables and payables.

Q: Can you elaborate on what clients should include in their financial reporting?

A: Absolutely. Clients should:

• Generate consistent, ideally monthly, financial statements.

• Be prepared to provide audited financial statements for credit facilities above $8 million.

• Be ready for field examinations to verify internal controls and financial practices.

For smaller companies lacking internal financial reporting capabilities, we recommend considering outsourced solutions like fractional CFO services to maintain consistency and accuracy.

Q: What internal financial controls are needed for ABL?

A: Strong internal controls are critical. Clients should:

• Have a dedicated accounting professional or team scaled to their business size. For loans exceeding $5 million, we generally expect a CFO-level oversight.

• Document and implement effective accounting controls to ensure accuracy and reliability.

• Participate in regular financial reviews and third-party audits to demonstrate the robustness of their financial practices.

Q: How important are loan covenants, and what should clients do to manage them?

A: Loan covenants are essential commitments required by the lender. To manage covenants effectively, businesses should:

• Maintain a clear, documented process for monitoring covenant adherence.

• Use spreadsheets or other tools to keep track of compliance.

• Provide realistic cash flow projections and clearly articulate their business strategy, particularly concerning how they'll manage collateral and improve cash flow if needed.

Q: If a client isn’t quite ready for traditional ABL, what alternative do you suggest?

A: For clients who aren't ready due to limited internal financial systems or controls, factoring or accounts receivable financing can be a viable alternative. Factoring involves selling accounts receivable invoices to a third party in exchange for immediate cash, typically with fewer requirements and simpler paperwork.

Q: What does your "bank-ready" checklist entail?

A: Our concise "bank-ready" checklist includes:

• Monthly financial statement production (internal or outsourced).

• Audited financial statements if required.

• Detailed accounts receivable calculations and understanding of borrowing base.

• Regular customer concentration analysis.

• Accurate payment matching processes.

• Use of standardized financial ratio templates.

• An appropriately scaled accounting team.

• Strong internal controls and clear covenant management processes.

• A well-defined business strategy and accurate cash flow projections.

• Consideration of factoring alternatives when internal capabilities are lacking.

Q: What can a broker, advisor, or consultant do to help their clients become bank-ready?

A: Brokers, advisors, and consultants can assist their clients tremendously by educating them on lenders’ expectations, guiding them through the preparation of accurate and timely financial documentation, and ensuring the implementation of necessary internal controls. They can also help clients manage customer concentration risks, develop clear strategies for meeting covenant requirements, and explore factoring as an alternative if traditional ABL isn't immediately suitable. Essentially, financial professionals and partners serve as critical intermediaries who streamline the preparation process, enhancing the likelihood of successful loan approvals.

Q: Any final thoughts for financial professionals working with ABL clients?

A: Yes. At TAB Bank, we highly value collaboration with financial teams that proactively prepare and demonstrate robust financial planning. The better prepared your client is, the quicker they can access capital for growth. Encouraging clients to fully engage with the bank readiness process not only improves their chances of securing financing but also strengthens their financial stability and operational efficiency.

For more detailed insights on becoming bank-ready, including the aforementioned “Bank-Ready Checklist,” download TAB Bank’s eBook: Achieving Bank Readiness for Asset Based Lending. 

To learn more about working with TAB Bank or referring a deal for ABL, visit the TAB Bank Broker Partnerships page.