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But as companies confront a tight credit market coupled with lower than expected results, many CFOs are viewing asset based lending as a viable option in the financing tool kit. Even successful companies with strong banking relationships can quickly fall out of favor with lenders and lose access to unsecured financing, especially if they’ve shown recent losses. A few bad quarterly results doesn’t necessarily mean that a company is in bad shape, but stringent bank underwriting parameters can cause existing loans to be called and prevent the firm from qualifying for new financing. A company facing such a scenario can use asset based lending (ABL) arrangements as bridge loans to pay off banks and provide liquidity until bank financing is achievable.

What is asset based lending?

An asset-based loan is secured by a company’s accounts receivable, inventory, equipment, and/or real estate, whereby the lender takes a first priority security interest in those assets financed. Asset-based loans are an alternative to traditional bank lending because they serve borrowers with risk characteristics typically outside a bank’s comfort level. These assets typically have an easily determined value. The financing can take the form of loans to revolving credit lines to equipment leases and can range from $100,000 to $1 billion, depending on needs and circumstances.

How can ABL be a beneficial financing option?

Acquisition

To grow a business, a company may look to acquire a strategic partner or even a competitor. Asset-based financing is often an efficient means to obtain funding for business acquisitions.

Turnaround Financing

Turnaround financing is often used by under-performing businesses that are not achieving their full potential. In some cases, it is used for businesses that are either insolvent or on their way to becoming insolvent. Asset-based lenders are accustomed to the bankruptcy process and asset-based financing is ideal for turnarounds because of its flexibility.

Capital Expenditures

Capital expenditure is the money spent to acquire and/or upgrade physical assets such as buildings and machinery. Capital expenditure is also commonly referred to as capital spending or capital expense.

Debtor-in-Possession (DIP) Financing

Debtor-in-possession (DIP) refers to a company that has filed for protection under Chapter XI of the Federal Bankruptcy Code and has been permitted by the bankruptcy court to continue its operations to effect a formal reorganization. A DIP company can still obtain loans–but only with bankruptcy court approval. DIP financing, which is new debt obtained by a firm during the Chapter XI bankruptcy process, allows the company to continue to operate during a reorganization process. Asset-based lenders also provide exit financing or confirmation financing to companies coming out of bankruptcy.

Growth

Typically, as a company grows so does its need for financing. Also, as a company’s collateral grows, its assets can strengthen its ability to borrow. An experienced and creative asset-based lender can assemble a credit facility that can scale to grow with a company.

Recapitalization

Recapitalization is the process of fundamentally revising a company’s capital structure. A company might recapitalize due to bankruptcy or replacing debt securities with equity in order to reduce the company’s ongoing interest obligation. A leveraged recapitalization typically achieves just the opposite–by taking on a material amount of debt, the company increases its ongoing interest obligation but is able to pay its shareholders a special dividend.

Refinancing/Restructuring

When a company enters or exits a growth stage, refinancing or restructured financing may be key to creating a capital structure that better meets the needs of the company. This type of financing is often used for market expansion, completing an acquisition, restructuring operations, or following a successful corporate turnaround.

Buyout

A buyout is the purchase of a controlling percentage of a company’s stock. In a leveraged buyout (LBO), the acquiring company uses the minimum amount of equity to purchase the target company. The target company’s assets are used as collateral for debt, and its cash flow is used to retire debt accrued by the buyer to acquire the company. A management buyout (MBO) is an LBO led by the existing management of a company.

What are the advantages to ABL?

· Tends to feature fewer covenants than other types of financing and those it does include tend to be more flexible. Cash flow loans, by contrast, often have four or five covenants including total leverage, fixed charge coverage, and minimum net worth.

· If a company is growing, the receivables and inventory it uses to secure the asset based loan is likely growing as well. Thus, the company has a greater collateral base and can borrow funds to fuel its growth.

· ABL instills discipline. Since the loans are based upon accounts receivable and inventory, the company is motivated to improve collections and complete the production cycle in a timely manner.

· As mentioned earlier, ABL imposes less stringent covenants compared to cash flow loans. These type of loans also provide better security to the lenders, which in turn allows them to grant more time to the borrowers to turn their company around in difficult times.

What are the disadvantages of ABL?

· Since the level of funding is contingent upon the asset values on the balance sheet, there may not be sufficient liquidity. Only asset rich companies would likely benefit, while many service companies would not.

· Such a requirement can be difficult for the company.

· Asset based lending tends to be more expensive than other types of financing, often three to five percentage points above traditional bank financing.

· ABL runs counter to the thinking of a lot of CFOs who believe it is dangerous to tie short term assets to long term financing.

Although ABL is now a common financing tool, it is not for everyone. It makes sense to explore all types of financing before deciding if asset based lending is the right choice. The CFO must review the state of the company’s credit, analyze the firm’s asset structure, and its current debt load. Asset based lending can provide the liquidity needed for the company to grow until less expensive bank financing is available.

Kent Harlan has been a CPA since 1984 and has provided consulting, accounting and financial services to several industries. He is the owner of Ozarks Capital Funding, LLC, a Springfield, MO based company offering financing in the areas of accounts receivable factoring, equipment leasing, asset based lending, and healthcare provider financing. Website: http://www.ocflink.com

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The best way to realize the American Dream of financial independence is, for many, to acquire capital for their business. Because lenders prefer to loan to businesses with established financial histories, loans through traditional lenders can be difficult for new businesses. In today’s market, it grows ever more difficult to obtain loan approval for the business capital you require. Whenever you turn on the news lately, it seems like there is always at least 1-2 new banks that is asking for the government to take over control and bail them out. It is no wonder banks are reluctant to lend, with all of this market volatility.

It can be intimidating to go through the business loan application process. According to a recent study, over 80% of small business loan applications are declined due to packaging and presentation alone! The good news is that, even in these times of tight credit, business capital is still available. Borrowers with good credit can still get approved for unsecured signature business lines of credit up to $250,000. Financial, such as balance sheets, business tax returns, profit and loss statements, etc., may not be needed to obtain these lines if the borrower has good credit.

A loan with an interest only payment can be great for cash flow purposes. Roughly, your payment would calculate out to be $65 for every $10,000.00. Based on overall qualifications, the term can range from 1-5 years. Even when the original term ends, you will able to renew the loan yearly assuming you have made all your payments as required. Because the lender is in business to make money, keep in mind the lender only makes money if you keep borrowing as well as paying on time. A lender or a bank has no reason to terminate a relationship as long as you are a good paying customer.

These loans will not show up on your personal credit if structured properly! Proceeds can be used for expansion or to float the business during slow times. In order to ensure that your application is initially approved, you must follow some simple procedures.

The first thing to look at is your credit history and how good it is. And if it is not very good, then you need to figure out how to improve your credit history. The minimum Fico score that will be accepted is 680. Most lenders use the Experian or Transunion score and the higher the score the higher the approved loan amount.

At least 5 trade lines or creditors, called the “rule of 5″, are included in credit guidelines. They must have been opened for a minimum of 5 years. You must own one or more credit cards with a credit limit which exceeds $10,000. You’re all set if you meet these guidelines.

Regarding your credit, make sure that your employer information is correct. It is imperative that information regarding your employer, such as name and address, agree with the information contained within your bank loan application. Do this first, so as to avoid a lender’s underwriter digging deeper into the credit file. In order to get a business loan your personal credit will be looked at. The more your credit is scrutinized, the more likely you will be denied for a loan.

You must be a business owner for a minimum of two years before you can complete the next step. It does not make a difference if the business entity is a sole-Proprietorship, Corporation, Limited Liability Company, etc. In order to satisfy the 2 year seasoning requirement, existing businesses can be purchased. If this is the method of choice, remember that ownership must be seasoned for ninety days before business lines of credit may be applied for.

As the business produces more profits, you will be allowed to attain more capital. As long as you remain a good paying customer, the limits are endless. Increases to your credit line can be requested every 6 months. Credit partners are also something you can use to your advantage. Almost every lender will require that you open some type of account with them. And they will expect this before they will approve your loan with them. This way they can set up automatic payment, which will be easier for the both of you. This indicates to the bank that you want to do business with them.

You will have access to more capital as you grow your relationship with each bank. Interest rates are based on what Wall Street Journal Prime rates are. There is always a few percent, usually anywhere from 1% to 3.5%, added to the Prime Rate.

Working with small business owners, Paul Chavez has spent 10 years helping owners like yourself obtain capital through unsecured loans. Try a no obligation, free consultation. Use our experience to your advantage and raise the business capital that you need. Come visit us here