As we move into 2018 with a healthy economy and the strongest economic growth reported in years, businesses are seeking to expand. Business growth creates the need for increased capital, and additional capital enables a business to pursue new growth opportunities, potentially launch new product lines and acquire equipment or simply update and improve existing operations within the company. While asset-based lending satisfies the need for more capital, both lenders and borrowers face an ongoing dilemma while procuring the additional resources needed to effectively manage these types of loans.
Lenders must balance the need for borrower reporting and collateral monitoring requirements inherent in ABL with the increasing costs of that oversight. Historically, the nature of ABL requires a time-intensive, manual process to create a borrowing base that effectively mitigates the risk associated with the revolving nature of account receivables and inventory. The detailed nature of this type of risk mitigation makes it difficult to scale up operations while maintaining a clear understanding of the collateral supporting the ABL loan.
Traditional ABL monitoring involves daily paper correspondence between the lender and borrower and requires the proportional headcount necessary to manage the process. Conventionally, the ABL borrower prepares a borrowing base and submits the supporting documents to the lender to determine the availability of funds. This process is time consuming and costly to borrower and lender alike.
ABL loans traditionally have higher yields compared to commercial and industry (C&I) loans, but these returns come with higher loan administration costs. Risk assessment and mitigation is increasingly more complex, requiring greater inspection and oversight of the collateral that continues throughout the entire term of the loan. Using a company’s revolving assets as the fundamental building block for the debt structure, an ABL lender can provide a tailored alternative to cashflow-based financing, offering greater liquidity, more efficient working capital management and less restrictive covenants.
For these benefits to be fully realized, the borrower and lender must work together to provide the lender complete visibility into the current state of the collateral. The opportunity to grow ABL portfolios is realistic and attainable, but competition and interest rate compression are forcing ABL lenders to find a new approach to managing these loans — a real-time online approach.
Can It Be Achieved?
In 2014, a bank with $25 billion in assets wanted to merge two ABL divisions in different states and time zones. One division used a cloud solution for ABL monitoring while the other operated in manual mode, relying on the borrower to prepare daily borrowing bases.
The bank’s transition from manual processing to an online cloud-based solution was a complete success. Due to the increased visibility of loans, documents, reports and ease of processing, the cloud solution provided by asset-based lending software XpediAR was chosen to consolidate the two divisions. As a result of improved efficiencies, overhead spending was slashed while the bank maintained and grew the combined ABL loan portfolio. The cloud-based solution enabled management to streamline documentation and improve the workflow of updating collateral and loans allowing
for reductions of processing personnel. The cloud system allowed for detailed review of invoices, collections and remittance advices, while system reports looking for fraudulent activity reduced the need for quarterly onsite audits. Borrowers embraced the cloud-based system and spent less time on reporting requirements.
This increased visibility also translated into better and timelier decision-making by loan officers. Borrowers benefited from the improvements as the burden of regular reporting was eased. Because both lender and borrower worked with visible online data, it was easier to reach a common understanding of the current condition of the collateral. Systematic reporting allowed for
real-time identification of deterioration in the borrower’s operational activity, e.g. negative changes in loan and A/R turns. The availability of the borrower’s current loan activity, including submitted financial statements in one place, meant that the entire commitment could be reviewed by simply printing a borrower summary report. Consequently, daily funding and annual renewal decisions were made more quickly and with fewer resources.
Reporting requirements of an ABL loan are among the most contentious points of negotiation between potential borrowers and lenders. An online cloud-based solution provides common access to data for both lender and borrower, which promotes more openness and transparency. Because an online platform significantly decreases the time and resources needed by the borrower to fulfill lender reporting requirements, it is more efficient.
An Online Borrowing Base
The online borrowing base enables borrowers to upload the needed support documents, which, in turn, are converted to an online borrowing base available to the borrower using a secured web based application.
For the ABL lender, the workflow can be distributed among processing staff. Collections and sales are updated and agings are processed to create the ineligible holds. The borrowing base is no longer simply a paper form reviewed by and managed by one person, but an accumulation of invoices and collections processed by the processors. The ineligibles are maintained and updated by uploading an aging, and the cloud system generates the required holds. The loan officer can review and approve advances requested by the borrower online.
With agings stored each month, an aging comparison can be made. If fraud is being committed, the items are often found in the comparison, including refreshing invoice dates, credit memos not reported, collection variances with lender, pre-billed invoices submitted during the last days of month and change of invoice amount.
Loan document management also becomes more efficient with a cloud-based solution. An easy, rolebased archive with searchable storage retrieval replaces the constant back and forth between borrower and lender. The lender spends less time searching for emails and/or looking for information. The cloud centrally stores documents for the entire processing team. ABL lenders can select which relevant and appropriate documents should be distributed to the borrower through online portal access.
By bringing everything online, ABL lenders can more efficiently monitor the risk within their portfolios, improve their workflow and provide additional customer service, resulting in longer borrower retention. Loan officers can evaluate their portfolios while working on advances. Sales assignments can be processed by one person, while payment posting can be done by another.
The transition to a cloud-based solution unleashes many of the inherent benefits in ABL, including greater liquidity, more efficient working capital management and less restrictive covenants. Borrowers will benefit from access to increased working capital without the onerous paperwork. Lenders can more easily scale their ABL business while minimizing loan administration costs and overall headcount. The management of documents and the workflow of updating collateral and loans is streamlined to allow efficient use of processing staff. Finally, working off common data for both the lender and borrower creates a more professional working relationship between the two parties. Because of the online cloud-based solution, both lenders and borrowers are much happier with the day-to-day operating relationship.