Asset-based loans put essential strategies within reach
By Joseph Nemia
Once considered a last-resort option, ABL has become a loan of choice for retailers.
From mobile pay to customer personalization, retailers today need the latest technology to stay competitive. But a majority of these technology solutions require a significant upfront investment. As a result, there is often a gap between what retailers aspire to change in their current business model and what their current technology allows.
Nearly 70% of companies say delivering a personalized experience is a priority, but 53% say they lack the technology to execute on that goal, according to a recent Forrester Research study. That dynamic is common throughout the industry. Retailers are eager to use technology to connect with customers using data and targeted marketing, but lack the upfront capital.
For example, modern point-of-service systems can be used to track inventory, perform accounting functions, and record employee hours. But many retailers still use outdated and inefficient systems, taking time away from serving the customer.
As the speed of technology innovation continues to accelerate, retailers may lose market share to tech-savvy competitors. To stay competitive, retailers should prioritize technology investments. Now is the ideal time for business owners, controllers, and CFOs at retail companies to evaluate technology assets and understand their needs. When considering new technology investments, retail professionals should take the following into account.
Asset-based lending options
One type of financing, asset-based lending (ABL) may be a good fit for retailers. This type of financing can be secured with tangible assets, such as real estate, equipment or inventory, or accounts receivable. Once considered a last-resort option, ABL has become a loan of choice for retailers.
If you have strong fundamentals, you may find that ABL offers the financial stability, predictable cash flow, and liquidity you need. ABL offers several advantages:
- It is typically faster and easier to qualify for than are unsecured loans or lines of credit.
- As assets grow, it’s often possible to increase the size of the loan.
- Because the loans are secured, they often have competitive interest rates as well.
- There are fewer limits on how the money can be used. Non-ABL financing may have numerous restrictive covenants that can be triggered if you have a bad season or experience a setback.
Flexible repayment terms can be the difference between staying open to give sales a chance to rebound and shutting the doors.
When selecting a financial partner, it is important to find one that has deep experience within retail and a strong balance sheet to handling ongoing needs throughout every business cycle. Any financial institution can provide a line of credit, but a financing partner with experience in the sector will have a better understanding of and insight into market trends and industry issues. For example, a financing partner with strong knowledge of disappointing sales cycles and seasonality can be prescriptive with the financing product and its structure. Your financial partner should understand the unpredictable factors, such as the weather or the economy, that can cause an unsuccessful sales season. A disappointing season can leave you with excess inventory and limited available capital to prepare for the next season.
There are numerous strategies for handling excess inventory, such as deep discounting, moving inventory to outlet stores, selling to off-price retailers, or simply packing it away for next year’s season. But none of these solves the problem of reduced cash flow. Financing partners that offer ABL revolving facilities tied to your collateral provide a logical form of working capital financing.
For retailers, technology holds the promise for stronger connections with customers, targeted marketing, efficiency in business operations, and additional sales channels. By getting the capital you need quickly, flexibly, and at a reasonable interest rate, you can execute your strategies and look to the future with confidence.
Joseph Nemia is head of asset-based lending for TD Bank.