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Asset Based Lending In Vogue
Some would say that 2010 is the year of the asset based lender, or at least that can be what it looks like for a lot of businesses trying to locate and secure financing.
Just to be clear, when I talk about asset based lending, this can cover off a lot of territory including such things as inventory financing, factoring, purchase order financing, equipment financing, private real estate mortgages, and asset based loan facilities that take some combination of receivables, inventory, equipment, and real estate as security.
As compared with corporate finance provided through traditional lenders like banks, the asset based loan providers are much more in tune with how to liquidate assets in order to get loan principal repaid if required.
In a typical, non recessionary market place, there are essentially three different categories of business financing provided by the capital markets to small and medium sized businesses. The first tier would comprise the corporate financing and small business lending programs provided by banks and larger financial institutions. The second tier is the business version of the sub prime market that is still institutionally driven, but with a focus on subordinate debt lending and higher risk corporate finance scenarios. The third tier is asset based lending where lending risk and the related rates are higher than traditional banking rates.
In the current market, the corporate and small business lending is slowly coming back, but remains very cautious. The sub prime lending tier is pretty much non existent, leaving the asset based lenders as the predominant lending option in many situations.
For the most part, asset based lending is used to finance growth, transition business ownership, and provide bridge funding for companies that have experienced a down turn in their financial performance and have hard asset equity to leverage to cash flow the business until financial results allow the business to return or acquire a lower cost corporate financing solution.
Major banks also have asset based divisions for medium sized businesses that are asset rich and require greater leverage than what traditional corporate financing can provide. But for the most part, asset based lending is focused on higher risk scenarios where some amount of operational uncertainty precludes traditional lenders from wanting to extend business capital.
In the current capital market, asset based lenders are seeing loan applications for lower risk scenarios than what they would typically be exposed to due to the lack of financing being provided by the other sources discussed above.
The result has been a considerable expansion of asset based loans particularly in the real estate market where private lenders continue to fill the void created by banks tightening up on their lending activities.
This is a hard transition for most business owners who feel that the economy is climbing out of the recession, but can’t get their bank or traditional lending sources to provide any new capital to their business operations.
For many, turning to a higher cost asset based lender is a hard pill to swallow as they feel their business should qualify for lower cost financing alternatives. But in the current market, growth and even survival is going to cost more with respect to business capital for many small and medium sized businesses and the sooner business owners make the adjustment, the faster they will be able to get access to commercial financing.
This is not to say that asset based lending is the only solution or best solution, but the current reality is that these higher cost financing options may be the only option available in certain cases, making their consideration more critical to the business owner.
Click Here To Speak Directly With Business Finance Specialist Brent Finlay
Even Higher Priced Asset Based Loans Can Work In The Present Market
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.