The Strategic Capital Stack: Using ABL and RBF Together to Master Your Cash Conversion Cycle
Smart business owners see financing as a strategic tool, not just a loan. No single type of funding can address every need. Instead, the strongest companies use a mix of capital sources to strengthen cash flow, support operations, and fund growth.
By combining Asset-Based Lending (ABL) and Revenue-Based Financing (RBF), a company can reduce cash stress, improve working capital efficiency, and gain the flexibility needed to move confidently through growth cycles. This approach is what we call a Strategic Capital Stack.
Key Points
- Purpose: Show how ABL and RBF work together to improve the Cash Conversion Cycle (CCC).
- ABL provides liquidity by advancing funds against receivables.
- RBF fuels growth with flexible, non-dilutive capital tied to future revenue.
- Together, they balance short-term and long-term funding needs.
- The Stretch Piece fills any remaining capital gap while maintaining lender security.
- Capital Source models results in advance, showing exactly how much cash, savings, and flexibility the structure delivers.
1. The Limits of Traditional Debt
Standard loans and lines of credit don’t always match how business cash flow behaves.
- When inventory builds ahead of a busy season, your Days Inventory Outstanding (DIO) rises.
- When a major customer delays payment, your Days Sales Outstanding (DSO) increases.
Fixed loan structures don’t adjust to these shifts. The result is unnecessary cash pressure, tighter covenants, and reduced operational flexibility.
2. ABL: Stabilizing Cash from Receivables
Asset-Based Lending (ABL) provides working capital based on the value of your receivables, giving you predictable liquidity when you need it most.
| Feature | Description | Impact on Cash Flow |
|---|---|---|
| Function | Advances cash (typically 80–85%) against eligible invoices | Converts receivables into near-instant cash |
| Impact | Reduces effective DSO and smooths daily cash needs | Keeps operations stable for payroll and expenses |
Instead of waiting 60 days for payment, you can access most of that cash immediately. ABL keeps your working capital flowing, even when customers take longer to pay.
3. RBF: The Flexible Growth Partner
Revenue-Based Financing (RBF) complements ABL by providing flexible, growth-oriented capital. Payments adjust based on your revenue, so repayment scales with performance.
| Feature | Description | Benefit |
|---|---|---|
| Function | A lump-sum investment repaid as a percentage of future revenue | No fixed monthly payments—flexibility during slow months |
| Optimize DIO | Allows bulk inventory purchases at better prices | Reduces cost of goods and increases margins |
| Optimize DPO | Ensures cash is available for early payment discounts | Converts supplier terms into consistent savings |
RBF helps businesses grow without giving up equity or locking into rigid payment schedules.
4. The Stretch Piece: Filling the Capital Gap
Sometimes, an ABL facility alone doesn’t provide enough total funding. That’s where Capital Source structures a Stretch Piece—a subordinated debt layer that sits behind the primary ABL lender.
This addition maintains the security structure lenders require while giving the business full access to the capital needed for expansion. It completes the Strategic Capital Stack, creating a balanced funding solution that fits real business conditions.
5. Modeling the Benefits: Proof Before You Borrow
Capital Source begins every engagement with a detailed financial model that shows exactly how the combined ABL and RBF solution impacts your cash flow.
- Total Cash Freed: How much liquidity is released by shortening the Cash Conversion Cycle.
- Annual Savings: The dollar amount gained through supplier discounts and reduced fees.
- Stress Reduction: Clear evidence that repayment terms won’t disrupt operations.
This data-driven approach gives founders and CFOs confidence before any financing decision is made.
FAQ: Strategic Capital Stack
Q1: What is a Strategic Capital Stack?
It’s a customized financing structure that combines multiple funding types—like ABL and RBF—to improve cash flow and support growth.
Q2: Why combine ABL and RBF?
ABL provides immediate liquidity against receivables, while RBF delivers flexible growth funding. Together, they balance short-term needs with long-term goals.
Q3: Is this structure right for smaller or growing companies?
Yes. It’s ideal for businesses with predictable revenue that need flexibility beyond what traditional loans offer.
Q4: How does the Stretch Piece fit in?
It covers any capital shortfall left by the ABL facility, ensuring full funding while keeping senior lender protections intact.
Q5: What can companies expect from this approach?
Faster access to cash, improved working capital efficiency, and measurable cost savings—all verified by Capital Source’s pre-implementation modeling.
Related Articles
- The True Cost of Debt: Not all financing costs are visible on a term sheet. This article breaks down the hidden expenses behind traditional loans and shows how to measure the real cost of capital to make smarter funding decisions.
- The Working Capital Cycle Explained: A clear look at how cash moves through your business—from purchasing inventory to collecting payments. Learn how to shorten your cycle, improve liquidity, and reduce stress on day-to-day operations.
- EBITDA vs. Cash Flow: What’s the Difference? Understanding your financial health starts with the right metrics. This article clarifies the key differences between EBITDA and cash flow and explains why cash flow often tells a more accurate story.
📞 Contact us today to explore options customized to your business needs.
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