The present capital market is more asset based and risk averse than what business managers and owners have gotten used to in recent history. And while a traditional asset based loan costs significantly more than what one would expect from a corporate financing program, the higher rates are something to seriously consider in the current market place.
The recession has created a lot of unfortunate circumstances for otherwise strong and well managed companies. As a result of lower sales, lender demands for repayment of existing debt, or capital required for expansion or equipment upgrades, business owners and managers are now forced to consider options they would never of previously given a second thought to.
But in lieu of where the capital markets are sitting right now, the asset based lenders have become the best option for many businesses, whether the business owner likes it or not.
From the borrower’s point of view, the lending rates between 1.5% and 2.5% per month can seem to be outrageous. But from the lender’s point of view, the rates reflect the risk in the market and are based more on an equity return than a debt return, which relates to the saying that with asset based loans, you’re renting equity as there are no other lower priced debt options.
From a cash flow perspective, the cash based loans tend to be interest only and are short term in nature, not intending to be in place for more than one or two years. So even though there is no principal pay down, the actual debt servicing requirement in the cash flow may actually be less that a lower priced corporate financing deal that requires an amortized repayment.
This is what can make the asset based solution affordable for many companies with asset equity and limited debt financing options. By being able to cash flow the debt service, even at higher interest rates, the business can potentially draw on the capital necessary to main or grow operations until things settle down and better financing options become available.
This is still a better option than selling off part of the company in that the owner has the ability to repay the debt at any time and retain full ownership and control. So like I said, its a lot like renting equity.