Asset-Based Lending (ABL)

Asset-Based Loans allow you to access capital based on the value of your business’ working capital assets, such as inventory and/or accounts receivable. Repayment coincides with the sale of inventory using payment received from your customers (think UNFI, Sephora, Target, even your Shopify store). ABLs are an attractive option for rapidly growing CPG businesses because they allow you to optimize cash flow; its flexible structure adjusts to working capital fluctuations.

Revenue Based Financing (RBF)

Revenue-Based Financing, on the other hand, allows companies to borrow a sum of money based on a multiple of your monthly revenue. The loan is then repaid over time, out of a percentage of your business’ monthly revenue. For businesses experiencing consistent, predictable growth or an upswing in revenue, Revenue Based Financing is able to provide a working capital cushion without diluting ownership or giving up equity.

Benefits and Risks…

With variable cash flow due to factors like seasonality, shifts in consumer demand, or product development cycles, ABL can offer more flexible repayment around these ebbs and flows. The loan amount can also be adjusted based on the value of the company’s assets, which means that the loan can increase as the brand scales.

When it comes to ABL, your availability depends on the value of your assets, so if inventory and/or accounts receivable are low, you may get more availability with RBF. But proceed with caution, as overleveraging your business can lead to some less than desirable outcomes like distress, difficulty accessing credit in the future, and cash flow tied up in servicing debt. For scaling businesses with growing demand via eComm and wholesale/retail, ABL typically provides a healthy, fiscally responsible amount of credit.

RBF can be a good option for businesses that are in a tight spot and need quick access to cash, as the diligence process for prospective RBF borrowers is typically less thorough. However, this can mean a higher cost of capital, as the lender may require a higher share of sales in exchange for taking on the risk that your business may not perform as expected.

With RBF’s benefits also come significant risks. RBFs can be fickle, putting your business in a difficult position when facing issues often out of your control, such as supply chain issues, being out-of-stock on key items, ad spend not hitting, market softness, and large wholesale orders falling through or getting pushed out. In these cases, a perfect storm of low cash, revenue volatility, and a pullback on loans could create a downward spiral leading to less working capital, less inventory, less revenue, and no ability to repay the RBF. For companies already low on cash and maybe raising in between rounds, RBF could exacerbate the situation when they hit a bump in the road.

Key Considerations When Making Your Decision…

If you’re exploring financing, it’s essential to understand the terms and repayment structure of your options, as well as the potential risks. We recommend asking the following questions before making a decision:

1. What’s the state of the economy? How would your loan be impacted by a downturn?
2. What’s the purpose of the financing? Funding inventory or an equity gap?
3. Have you thoroughly explored all of your financing options?

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