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October 24, 2005

Asset-based Lending: Learning a New Set of Tricks

October is a month of tricks and treats. And since success in business is so often contingent on how well an entrepreneur can think outside the box and the extra tricks he can pull from his sleeve, what better time to discuss some new perspectives on commercial financing?

We’ve all heard the old adages: “It takes money to make money.” But at a time when the economy is by most accounts booming, it’s also becoming harder and harder for a small- to mid-sized business to secure the funding it needs to prosper.

After the Internet bubble burst, many venture capitalists — the very people who had built a reputation on taking risks — clammed up and became increasingly wary about the types of deals they would involve themselves in. As for banks, well, they remain as conservative as ever with a stringent set of criteria as to whom they’ll lend to and why.

Across America, businesses are hungry for new solutions to their cash problems. It’s our mission as members of the financial services sector to develop and evolve specific strategies to satisfy this hunger. For the financial professional, doing business in 2005 presents new challenges and, at the same time, offers profound opportunities. Today, the savvy financial professional uses every resource available to seal the deal and serve his client; and all of us can benefit from having an extra tool in our belt.

Asset-based financing is just such a tool.

Asset-based lending (ABL) offers a flexible and customized approach to financing commercial enterprises. The term is a broad characterization that can refer to any number of specific financing solutions with one important variable in common - hey are all secured by one or more tangible assets.

In its purest form, a mortgage is a type of asset-based loan. But more typically, ABL refers to loans secured by assets such as accounts receivable, inventory, capital equipment, notes, or even intellectual property. The goal is to maximize borrowing capacity while utilizing concrete, valued assets as collateral. In an ABL arrangement, the borrower retains ownership of the assets, forfeiting them only in the case of default. In effect, he is borrowing against his asset base on a recourse basis. This differs in practice from factoring, where the receivables are actually bought by the lender at a discounted price and on a non-recourse basis.

Asset-based lending is increasingly becoming mainstream. The asset-based financial services industry has burgeoned in recent years, and small businesses have fueled much of its growth. Over the past several years, competition has brought down the notoriously high interest rates historically associated with ABL and has made secured financing a much more attractive prospect for an ever-growing population of entrepreneurs. Businesses that don’t meet all the criteria they needed for a traditional bank loan rely on ABL for its quick turnaround and ability to solve short-term cash needs.

By borrowing against current and fixed assets, management is able to generate cash sooner than if it had to wait for inventory to become accounts receivable and for accounts receivable to become cash. For businesses that can’t get traditional financing, ABL serves as a financial life raft to help navigate through the cash-dry periods between projects and billing cycles.

During the life of the loan, the collateral supporting a secured credit facility will be monitored, which is beneficial to both the borrower and lender. In this way, the lender can make available the largest possible loan supportable by the collateral. This monitoring typically consists of field examination audits and accounts receivable verifications.

As in virtually all lending relationships, the borrower is responsible for the lender's out-of-pocket costs, which could include legal fees, audit fees, and appraisal fees, if necessary.

By its very nature, ABL is designed to give entrepreneurs access to working capital by using creative resources. For the lender, asset-based financing tends to be extremely lucrative, and with the lender relying on the value of the underlying collateral, a loan's credit risk is greatly minimized. Today, asset-based lenders include commercial finance companies and the secured lending departments of banks, which in recent years have significantly expanded their activities.

So, as October comes to an end and Halloween approaches, try using a new set of tricks to offer your clients a real treat! No costume required.

Written by: Howard Chernin is senior vice president of Quantum Corporate Funding, Ltd., a nationwide asset-based lender and factor located in New York City. He is a member of the National Association of Mortgage Brokers, the Commercial Finance Association, the Construction Financial Management Association, and the International Factoring Association. He resides with his family in New Jersey, where he serves on the Board of the YJCC. For more information, call 800-352-2535, e-mail hchernin@quantumfunding.com, or visit www.quantumfunding.com.

Source: American Cash Flow Journal (October 2005)

Posted by dspringer at October 24, 2005 06:12 PM