Companies Borrow Against Their Assets in an Uncertain Economy

livemint.com:

More companies are borrowing against their assets, including inventory and receivables, as finance chiefs look to bolster liquidity amid financial stress from inflation and high interest rates. Asset-based loans have a particular appeal for chief financial officers during periods of economic uncertainty. The draw: Companies don’t need to meet the same types of leverage and performance requirements included in loans based on a company’s cash flow.

By pledging their assets, CFOs receive the comfort of knowing that a string of tough quarters or big investments won’t put them in hot water with their lenders. Banks typically expect to see an uptick in borrowers shifting into asset-based loans from cash-flow loans when the economy is on shaky ground. Over the past year, an increasing number of companies have made the shift, according to commercial bankers and executives, who described the trend as notable though not at the scale of previous downturns.

Companies in sectors including retail and consumer products are moving into asset-based loans because their profit margins are being squeezed by higher borrowing costs and persistent inflation, bankers said. Some also see an opportunity to borrow more against assets that are rising in value. “We’re busier now than we were a year ago with internal transfers back and forth—mostly one way, toward us," said Brent Hazzard, head of asset-based lending at Citizens Financial Group.