ABLs use key provision to link borrowers and financiers

Once considered the financing method of last resort for distressed companies, asset-based lending (ABL) through firms like Bridge Business Credit has emerged as a structure of choice for companies of all sizes across a wide range of industries.

Today an ABL is no longer just an attractive alternative in challenging times when cash flow is strained, but is also a practical financing method during “good times.”

A key aspect of an asset-based lending agreement, where the financier is providing a borrowing base loan secured against the borrower’s receivables, is to include provisions that relate to “dominion of funds,” also known as “lockbox.”

The term dominion of funds is used to describe the mechanism where the proceeds of receivables collected into a borrower’s collection accounts are swept to the financier and applied to repay the loan, as opposed to being transferred to the borrower’s general trading accounts for its own use.

Dominion of funds provides obvious benefits for the financier since the financier will usually have taken control over the proceeds of those receivables when activating the loan. At the same time, by virtue of the loan being repaid using those proceeds, the financier’s exposure at any time is more closely aligned with the value of unpaid receivables.

In turn, the borrower should not be significantly inconvenienced by the application of the proceeds to the loan, as this will free up availability and allow the borrower to draw down further amounts if there is sufficient borrowing base availability.

Dominion of funds may be in place from day one of an agreement or may be triggered on a springing basis (see below), depending on the commercial agreement between the financier and the borrower

Another common feature built into ABLs is “springing dominion.” With this feature, if the borrower exceeds a certain level of borrowing base availability, say 15%, as its A/R is converted to cash, the borrower retains control over its A/R conversion. It’s only when availability drops below that threshold, in this example of 15%, that the proceeds are governed by “full dominion” and are automatically swept to pay down the outstanding revolving loan balance.

If the loan is a “springing dominion” transaction, then typically so long as the level of the outstanding debt is lower than the borrower’s available credit under the asset-based lender’s loan facility or less than the borrowing base, the payments may be sent to and collected in a lockbox and swept to an account controlled by and accessible to the borrower.

In a “full dominion” asset-based loan, the payments that are paid into the lockbox account are applied to repaying the outstanding balance owed on the asset-based loan as the payments are received daily.

These type of dominion stipulations can be at the heart of any workable ABL, allowing both the financier and the borrowing company to work together in a relationship that insures protection for all of the parties involved and promotes economic success, whether in good times or challenging ones.

Have questions about dominion of funds or other asset based financing concerns? Our team of experts at Bridge Business Credit is ready to help. Contact us to learn more about our easy financing options.