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Beware of the ABL Trap: The Challenges of Retail Chapter 11 Debtors and Asset Based Lending

August 29, 2017Article
Small Enough to Fail Blog

An asset based loan (“ABL”) is often the financing of choice for retail borrowers – and for good reason. In its simplest form, an ABL is a credit facility, usually in the form of a revolving line of credit, the availability of which is based exclusively on the value of a company’s “eligible” assets.  In the retail context such eligible assets are, for the most part, the company’s accounts receivable and inventory. 

There are numerous advantages of an ABL over a traditional loan: an ABL is typically easier to obtain since it is based on a company’s assets and not cash flow; an ABL provides ready cash to support liquidity needs; an ABL often includes flexible borrowing and repayment terms and less restrictive financial covenants; and, particularly beneficial to retailers, an ABL commonly accounts for seasonality and allows more borrowing during periods of slower sales. 

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