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What is the best use of an Asset-based loan?
Asset based lending is most often used in financing a company’s rapid growth
when there is insufficient equity capital. "Five to ten years ago, asset-based
financing was considered rescue financing and the lender of last resort," says
Joyce White, the New York City-based president of Bank of America Business
Capital. Today, many executives prefer asset-based loans because they lack the
financial performance covenants imposed by cash-flow loans. Additionally, they
provide flexibility for businesses in a growth spurt, because the loan amount
can increase along with the borrower's inventory and receivables. An
asset-backed loan can track the business growth.
Asset based revolvers are used for:
 Rapid or Hyper Growth
Short Operating History
Turnarounds
Seasonal Sales Cycles
Acquisitions or Mergers
Shareholder Buyout
Bankruptcy (Debtor-in-Possession)
Who provides Asset based loans?
Lenders can include the asset-based lending arms of commercial banks, small to
large independent finance companies, floor plan financing companies, factoring
companies and financing subsidiaries of major industrial corporations (UPS, IBM
etc.) Asset based lenders are often referred to as secured lenders.
What’s the difference
between a a finance company and a bank?
While both lend money to businesses, a bank is regulated by state and federal
governments and has certain reserve requirements. Finance companies are not
regulated in the same way and, as a result, can take on a larger diversity of
loans and move faster in response to market changes and customer requests. A
lender that is not subject to state and federal bank regulations is not required
to risk rate its loans. However, lenders who accept public deposits, such as
commercial banks that also provide asset based loans, must risk rate their loans
for the respective state and federal bank regulatory agencies.
Who uses Asset-based loans?
The asset-based lending financial services industry has exploded in recent years, and
small businesses have fueled much of its growth. But household names, including
Goodyear and Bumble Bee Seafoods, LLC, have used it in the past several years.
According to the Commercial Finance Association, the total outstanding monthly
average of asset-based loans jumped from $117 billion to $362 billion between
1994 and 2004. The users of asset based lending span a broad range of
industries, with manufacturers represent approximately 31% of the total
marketplace, followed by wholesalers (28%), and retailers (17%). By revenues,
the large majority of these borrowers (71%) are under $50 million in size.
Publicly held companies use revolver credit facilities for the same reasons any
company uses them—to accelerate cash flow and to optimize the use of existing
assets to provide working capital. A revolving credit line often provides a much
lower cost source of working capital than raising additional equity.
What is a Revolving Credit facility (“revolver”) and how does it work?
A revolver is a loan which can be drawn down and repaid. With regard to an asset
based loan, a revolver is secured by the borrower’s liquid, current assets such
as receivables and/or inventory. An asset based revolver accelerates cash flow
by enabling a business to borrow against the future value of receivables and/or
inventory that are expected to become cash in the near term. This acceleration
of cash (or “advance”) provides liquidity in order to take care of immediate
expenses such as payroll, inventory, fuel and daily operating expenses.
What is the advance rate?
The advance rate is the percentage of the current borrowing base that the lender
can make available to the borrower. Traditionally the advance rates will be
80-85% of accounts receivable and 50% of inventory, although there are factors
that can influence these formulas upwards or downwards. Most receivables from
completed transactions are eligible but pre-billing or progress billing is not
considered. Other typical examples of ineligible receivables would include
receivables 90 or more days past due, any intra-company receivables, certain
government receivables and foreign source receivables. Treatment of inventory
varies from company to company and from industry to industry. It would not be
unusual for eligible inventory to include all finished goods and marketable raw
materials. It would be much less common to include work in process, damaged
goods, slow moving inventory, or certain specialized products that can only be
sold to a limited number of purchasers. Many lenders seek advice regarding the
appropriate advance rate from outside appraisal firms that specialize in
assessing the collateral value of inventory goods.
What are the cost and fees involved?
The cost of an asset-based lending transaction is influenced by the credit risk and collateral
associated with the transaction.
When evaluating an asset-based loan, borrowers should assess the cost of
financing in the context of the benefits to be received. Compared with other
financing alternatives such as equity, asset-based lending is very cost
effective and efficient. There is generally a commitment fee and closing fee.
The commitment fee is paid in cash upon obtaining the commitment. The commitment
fee is often credited toward payment of the closing fee, and the balance of the
closing fee generally is paid from the proceeds of the initial loan. Each of
these fees may range from one-half of 1% to 4% of the loan. Fees may vary
depending on the calculated risk, credit- worthiness of the borrower, the type
of situation being financed, and other considerations. For example, fees charged
to a company that are in bankruptcy will differ from a fast growing company that
is seeking to refinance its senior loan debt. Depending on the type of loan,
some other typical fees may include: an administrative fee for monitoring and
auditing the collateral, an unused line fee to compensate the lender for its
cost to preserve the liquidity available to lend the borrower the maximum amount
of their committed line, a prepayment fee to compensate the lender if the
borrower decides to end the line thereby limiting the lender’s projected income
from the loan prematurely. Other costs which are the borrower’s responsibility
include the field examination and the borrower’s and the lender’s legal
representation. The amount of these fees will vary according to each borrower’s
circumstances.
How long does it take to close an Asset-based loan?
The average timeframe you should expect is a 4 - 6 week period from the date a
proposal is accepted until the loan is funded. Naturally, depending on the
complexity or type of facility it may take more or less time. Closing for asset
based lending can take
longer if extraordinary conditions such as significant inter-creditor
negotiations or third party consents are required to complete the transaction.
View and print a copy of this article (pdf version):
Asset Based Lending
Business Finance Articles
of Interest:
Asset
Based Loans
Consumer Receivables Financing
Increases Sales
Invoice Factoring – A Financing Solution for
Emerging Businesses
Purchase Order Financing
(Trade Financing) for growing companies
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