Expert in all facets of collateralized lending, asset-based lenders – large and small alike – possess the experience and know-how to structure the proper financing program for their borrowers. They specialize in financing businesses and business transactions involving a broad range of products and services, both domestically and internationally.
Acceptable Collateral Types
Asset-based lenders are collateral lenders, as opposed to cash flow lenders. They focus first on the collateral's cash conversion cycle for repayment and on cash flow second. Asset-based lenders loan money to companies using two main types of credit facilities:
- Working capital facilities based on accounts receivable and/or inventory: Loans which finance accounts receivable and inventory are typically structured under a revolving line of credit or "revolver," without a scheduled repayment. The lender advances funds against the revolver to carry accounts receivable and inventory and, when such assets convert to cash, the advances are repaid accordingly.
- Fixed asset facilities to finance equipment and owner-occupied real estate: Loans financing equipment and real estate typically take the form of term facilities with a scheduled repayment usually equal to the fixed assets' useful life. Some asset-based lenders will not take on term debt or limit their exposure to it, since such debt carries a higher degree of risk than revolving debt. Equipment finance companies, leasing companies, and mortgage bankers specialize in fixed asset financing and provide such financing on a transactional basis.
When do asset based loans make sense?
Good candidates for an asset-based loan have tangible or financeable assets that can be used as collateral, such as accounts receivable, inventory, equipment and real estate. These companies may have high leverage ratios, as measured by debt to equity, typically over 5 to 1, or may be marginally profitable companies, companies with a recent history of losses, or with inconsistent cash flow.
But since the asset-based lender focuses on collateral, the borrower's eligibility for loan qualification is determined from an evaluation of the quality, liquidity, and sufficiency of the borrower's eligible assets. The lender analyzes each asset class to determine its net realizable value in a liquidation situation. It then uses this information to exclude certain assets from financing and set maximum advance rates.
If the advance rate established by your lender creates adequate liquidity, asset based lending may be an appropriate solution to your company’s current financial requirements.
Acceptable Uses of Funds
Asset based loans provide capital for a wide variety of financial requirements including:
- Leveraged mergers and acquisitions
- Turnaround/restructuring situations
- Liquidity events for family-held businesses
- Growth opportunities
- Capital expenditures
- Tight working capital
- Seasonal or cyclical companies
- Specialized industries
- Stock repurchase
- Public ownership to private ownership
- Debtor-in-possession (DIP)/confirmation financing
Asset-Based Lending vs. Traditional Bank Financing
The primary difference between commercial banks and asset-based lenders is where they each look first for repayment: The bank looks to cash flow for repayment first, then collateral; while the asset-based lender looks to collateral first. Since banks underwrite cash flow as their primary repayment source, they typically require less collateral controls and monitoring but more financial covenants.
For companies that are "asset heavy," an asset-based credit facility may be able to make more funds available because the loan is not based strictly on the anticipated levels of cash flow. Additionally, the structure often requires fewer covenants, thereby providing more flexibility for many borrowers.
How does the asset-based lender monitor its borrowers?
The level of controls and monitoring by the asset-based lender is directly related to the credit-worthiness of the borrower. Typical controls include:
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