How Asset-Based Lending (ABL) Works in Turnaround Situations

When a business is, or has been, in distress and is working to become healthier, it is considered to be in a turnaround situation. Often, the company’s bank has asked it to exit and find a completely new financing partner or a source of additional capital. In either scenario, that’s where Celtic Capital comes in.

We not only provide the funds a business needs to operate, but we also bring a level of discipline that helps business owners look at their businesses in a different way and focus on the issues that will ultimately drive a turnaround, including:

Are the accounts receivable (A/R) turning as they should?
Are customers paying according to their terms?
Are collections being actively managed?
Is too much cash tied up in inventory?
Are expenses appropriate for the current level of sales?
What changes are being made to improve cash flow?

These aren’t just questions a lender asks. They are questions business owners need to answer to understand where the company’s cash is going, what needs to change to get the business healthy again, and to formulate a turnaround plan.

Turning a Plan into Reality

A turnaround plan is only as good as the assumptions behind it. It’s imperative for business owners to understand what’s actually driving their projections and whether those assumptions are realistic.

That means looking closely at things such as:

Sales: Are projected sales supported by confirmed orders, existing customers or simply expectations?
Collections: If A/R turn is expected to improve, what specifically will cause customers to pay faster?
Inventory: Is inventory supporting sales or is it tying up cash that the business needs elsewhere?
Expenses: Which costs can realistically be reduced, and when will those savings show up?
Cash needs: How much working capital is required to keep the business operating while the turnaround takes hold?

Celtic Capital works with borrowers to establish the reporting and information needed to monitor these issues. But the benefit extends well beyond lender reporting. The business owner needs this visibility to know whether the turnaround is actually working.

For example, there’s a big difference between expecting an order and having a confirmed order in hand. The same is true of projected expense reductions or improved collections. The more grounded the assumptions, the better management can plan and the less likely it is to be surprised by a cash shortfall.

Bringing Discipline to a Difficult Situation

For many business owners, a turnaround is unfamiliar territory. They may suddenly have to manage cash much more closely, communicate regularly with their lender, stretch vendor payments, monitor collections and explain why actual results differ from projections. That’s why the additional discipline associated with ABL is so valuable. An ABL relationship isn’t simply about providing a borrowing base and making funds available. It creates a framework for management to continually ask:

What is happening?
Why is it happening?
And what are we doing about it?

Those questions can help management identify problems earlier, make better decisions and stay focused on the actions that can improve the business.

A successful turnaround requires more than capital. Celtic Capital provides the financing needed to support the business while working with business owners and their teams to understand the underlying issues that originally caused the business’s financial difficulties, test assumptions and maintain focus on the actions that can improve the company. The objective isn’t simply to finance a business through a difficult period. It’s to provide the liquidity and discipline that can help management execute its turnaround plan and build a healthier business for the future.

About Celtic Capital
Companies looking for working capital to cover operating expenses, fund growth, increase buying power, and take advantage of vendor discounts and rebates turn to Celtic Capital. With an appetite for more complex transactions, Celtic Capital has a history of success in crafting creative, flexible asset-based financing solutions from $500,000 to $8 million with no financial covenants.

As an independent lender, working with companies nationwide, Celtic Capital is willing and able to alter price and deal structure and expand lines of credit to handle its clients’ increased revenues; and when cash flow is an issue, will look toward providing an inventory facility to help offset lost cash flow.