Spotlight on asset-based lending as CIBC team forecasts portfolio volume growth
Beginning another year with COVID still very much in the forefront is no easy task. But there are some bright spots on the horizon.
Bruce Denby, Asset-Based Lending, CIBC US Commercial BankingMar. 11, 2022
Beginning another year with COVID still very much in the forefront is no easy task. But there are some bright spots on the horizon: The U.S. economy is expected grow at a robust pace of 3.5% in 2022, led by continued expansion in consumer spending and higher investment in business technology, according to The Conference Board Opens in a new window.. At the same time, delays at ports around the world amid the ongoing COVID pandemic — coupled with labor shortages and higher prices for raw materials — are forcing companies to become even more nimble and creative to meet increased demand for orders.
The combination of these factors is creating opportunities for companies seeking financing to further their business goals. The asset-based lending (ABL) market, in particular, is expected to experience improved portfolio growth for the first time since 2006, said Bruce Denby, group head of CIBC’s ABL team.
As clients seek to buy new equipment that can keep up with the increased demand, or to build up inventory that is now more expensive amid historic prices for raw materials and overseas shipping costs, CIBC’s ABL group has access to real-time data that can help executives quickly make important financial decisions.
“We can quickly respond to changes in our clients’ liquidity or performance,” Denby said. “We’ve had clients that accumulated slow-moving inventory of which they were previously unaware. However, because they do their reporting through us, that data allowed them to focus in on those SKUs and work to reduce them. Then, they could get that cash back out and reinvest it in inventory that’s performing.”
Furthermore, ABL’s real-time data helps CIBC relationship managers confront prevailing obstacles in today’s market. “Conversations with clients used to be about demand, so we would ask questions like, ‘How does the backlog look?’” Denby said. “Now, it’s more about sourcing and supply chain timing, so the question becomes, ‘Can you get the product?’” Asset-based lending utilizes real-time data to help monitor clients’ financial performance, “resulting in us having a very good understanding of how they’re doing at any point in time,” Denby said.
Moreover, access to up-to-date information gives the ABL group the ability to further evaluate client circumstances. “It also allows us to be proactive in conversations as we can see tightening that’s occurring because of inventory increases, which is in real time with what’s happening today. So we can ask: ‘Do we need a larger line? Do we need to look at inventory sublimit increases and what’s driving this?’”
That’s where ABL becomes a better tool for some cyclical and seasonal companies, Denby said. “When we see quick swings or seasonal swings in the collateral, the ABL lender can ramp up its capacity and sublimits of the borrower to borrow more money much more quickly than the commercial lender that is seeing this data 20 to 30 days after a month end,” he said.
An interesting twist to this next wave of COVID-related issues is that new equipment purchases have more to do with labor shortages than cost savings, according to Denby. Business owners find themselves in need of machinery to compensate for a lack of employees and are investing in new devices in order to get their products out the door. Traditionally, replacement costs pay off in terms of increased efficiency. But according to Denby, “It becomes more of a reality that you’re going to see some spending to replace the people that they just can’t get.”
COVID-related issues tied to product deliveries and labor shortages are prompting a change in the way companies stock inventory and source their materials. If your business is subject to these trends, seasonal or cyclical in nature, an asset-based loan may be a good financing choice.