Posts Tagged ‘asset based lenders’
Asset Based Loan Fit
January 14th, 2011
“When Does It Make Sense To Take Out An Asset Based Loan?”
We are in a period of time where asset based loans have grown in significance due to the more conservative approach currently being taken by banks and institutional lenders.
In most cases, Asset Based lending is significantly more expensive than bank or institutional lending, reflecting the higher level of risk inherent in the business being financed. With greater cash flow comes lower cost forms of asset based lending as well, but for the purposes of this discussion, I’m referring to asset based lending that falls in the 18% to 24% per annum type rate range.
Any business owner will tell you that you can’t function long term on those types of rates and for the most part, they are absolutely correct.
The higher priced, and more traditional form of asset based lending is meant to be short term in nature, dealing with either distress or growth.
In a distress situation where the business is failing, gone through a down turn in the market, or has been unceremoniously dumped by its institutional lender for some reason, an asset based financing facility buys time to either turn things around, wind down, or sell off in a manner that does not destroy value or equity in the process.
For situations of growth, if the growth rate is too high, especially for newer businesses or smaller scale businesses, banks and institutional lenders will shy away from business financing these situations due to risk of the business not being able to properly scale growth and crashing and burning at some point along the way to a better top and bottom line. Once higher levels of sales are maintained over a period of time, then lower cost forms of money will be more than happy to step in and take over the business. They just don’t have the stomach for the potential wild ride that may occur during a growth spurt.
Neither a growth or distress situation can be sustained for any length of time which is why the asset based financing can be a very good fit, even at significantly higher rates of interest than what can be secured through an institutional lender.
In situations where the business is asset intensive and needs a high level of financing leverage over the long term, an asset based financing solution can still work, but its going to have to be a lower cost version which tends to require a minimum facility size of $5,000,000 and strong cash flows and margins to support a lower cost of funds.
Business FinancingInstitutional Asset Based Lending
October 9th, 2010
“The continual Evolution of Institutional Business Financing Programs Towards Asset Based Lending”
While asset based lending models have been well entrenched in the U.S. landscape for decades, they are still evolving in the Canadian market place.
This is largely because corporate lending criteria doesn’t work in recessionary periods and post recessionary periods where the economy as a whole is operating at a lower level of performance resulting in poor or suboptimal financial statements in many industries.
Corporate finance lends off of financial statements that show strong cash flow and low debt to equity ratios. During and immediate after a recession, especially one as severe as the current one, hardly any money is being provided from these sources for businesses to operate and in many cases, the money supply is contracted due to risk and perceived risk.
Enter the world of the asset based lender where there is a stronger link between lender and borrower with more established rules for managing cash flow and risk that allows the lender to participate in situations where they would otherwise have to pass.
In the last few years in Canada, all the major banks and several U.S. entrants into the market have jumped into the asset based lending world with some being fairly aggressive with their programs for lending money.
While most of these programs are only focused on loan requirements of $5,000,000 or higher, the advancement of the industry in general is good news for small and medium sized business owners who are scratching their head trying to find a source of capital they can cash flow within the profits available in their business.
Institutional asset based lending can have considerable pricing variations off of prime, but this is still considerably cheaper than what I will all traditional asset based boutiques that start at 18% and go up from there.
The key to getting the money and making it work for you is to take on or evolve your financial discipline so you can make all the rules and regulations with this type of money work. In the end, the discipline that any asset based lending facility injects into a business is almost always a good thing that will help not only with short term survival but also long term growth and prosperity.
From a commercial lenders point of view, the evolution to asset based lending makes a great deal of sense in terms of not only managing risk but being more comfortable putting money out into the market.
I believe asset based lending will continue to evolve in all lending categories and become a more prominent form of business financing for many business owners now and in the future.
Click Here To Speak Directly With Business Financing Specialist Brent Finlay
Business FinancingAsset Based Financing is Bridge Financing
September 1st, 2010
“With Some Exceptions, Asset Based Financing Is Only A Temporary Source of Business Loans”
Unless you’re a fairly large company with substantial profitability and assets, its unlikely that an asset based lending solution is going to be a long term or even a medium term funding solution.
The reasoning is fairly simple. The cost of most asset based lending will either not be affordable long term or will substantially eat away at your profits.
The focus of an asset based lender is to finance assets that either they can control directly or that they can easily set up a clear liquidation pathway to get their money back from the liquidation of the assets.
This specialized form of lending charges a premium for the lenders ability to provide funding in situations where conventional or traditional lenders will not be interested. By becoming focused on a slice of the asset lending market, the lending competition can be very minimal in many locales, creating an opportunity for pricing that reflect the underlying risk to the lender.
If you ask an asset based lender why their pricing may be substantially higher than a conventional financing source, the lender will regularly offer back that you’re renting equity due to the fact that the business does not have sufficient retained earnings from profitable operations or paid in capital to secure cheaper forms of money.
While some may feel this is a bit of a cheeky answer to the question, there is a lot of truth and merit in it as well.
First of all, the next option for financing if an asset based loan is secured will likely be an equity investor or equity injection from the current owners. Any investor will require a return on capital at or above what an asset based lender will be charging.
Second, by acquiring capital in the form of a loan, it can be acquired without diluting ownership and paid back according to an agreed upon repayment schedule.
Which leads us back to bridge financing. Outside of institutional asset based lenders that are priced off of the prime rate, the next best pricing options will need to get comfortable with how they are going to get paid back in one or two years or they won’t fund the deal.
Why? Because they know the cash flow will not be able to handle the higher cost of financing for an extended period of time and that without some realistic transition plan to cheaper money in the future, they will likely pass on the financing opportunity. This will then lead to even more expensive asset based loans that are more closely aligned with liquidation and price their financing accordingly, knowing full well that may of the borrowers will fail to turn the business around or find an exit strategy that will repay the debt.
That’s why its important to only enter into an asset based deal if you can clearly see the other side of the bridge or the probability of getting something in place is pretty high.
Otherwise you’ll on a bridge to nowhere fast when the cash flow can no longer service the debt.
Click Here To Speak To Business Financing Specialist Brent Finlay
Business FinancingAsset Based Loans
July 25th, 2010
“Because There Are So Many Types of Asset Based Loans and Asset Based Lenders, It Can Be Hard To Determine Which One Is Best For A Given Situation At a Given Point In Time”
First of all, asset based lending is all about providing more lending against the available hard assets of a business. The more predictable the resale value of the assets pledged as security, the larger the amount of financing that can be provided by an asset based lender.
Just like all forms of business financing, there are different levels of asset based lending set up according to credit rating and business performance. At the lowest cost level, banks and institutional lenders have asset based lending divisions that focus on providing greater asset leverage to their higher end clients that have an asset intensive balance sheet and require more leverage than what the bank’s traditional corporate finance division can provide to run their business.
The more traditional form of asset based lender focuses on borrowers that do not quite fit the bank’s asset based lending requirements. Slipping into this realm of asset based loans can push the lending rate from prime plus interest into annual rates of 12% to 18%. The cornerstone of these asset based models is the businesses accounts receivable and the resulting cash flow they create.
Still higher priced asset based lending becomes more focused on individual assets , or groups of assets, such as accounts receivable, or accounts receivable and inventory, or inventory only, or equipment, or real estate, and so on.
Sometimes companies with significant assets in all major categories (accounts receivable, inventory, equipment, and real estate) will work with a combination of different asset based lenders to get the best overall leverage and repayment terms.
The challenge with all of this is to locate the most suitable asset based lenders that are relevant to your situation, assets, and needs at a given point of time. In certain cases, the variability among lenders providing asset based loans on certain types of assets can be considerable resulting in borrowers paying higher costs of financing than they need to.
But when time and money are short, its easy to take the first thing that’s available in order to keep the business going and then hope that there is going to continue to be sufficient margin available from sales to pay the higher interest costs and to get the business to a position of profitability that will allow it to return to a cheaper form of debt financing.
The best way to determine what you’re preferred options are at a given point of time is to work with a business financing specialist who understands the current market and lender underwriting.
Click Here To Speak With Business Financing Specialist Brent Finlay
Business FinancingAsset Based Lending Grows In Importance
July 7th, 2010
“Asset Based Lending Has Become a Necessity For Many Small And Medium Sized Businesses”
The recent recession has elevated the importance of the asset based lending market, creating both higher supply and demand in the process.
Asset based lending has a number of different slices, but essentially we’re talking about lenders that have a primary focus on the asset resale or liquidation value for determining loan amounts and security ratios.
Surprisingly to some, major banks also house asset based lending divisions to focus on providing higher leverage to companies with well established cash flows. The bank version of asset based loans are also priced off of the prime rate, making them very rate attractive compared to more conventional asset based lenders.
The growth of this business financing segment has been built on the ultra conservative approach being taken by banks and other institutional lenders. A large chunk of debt financing has traditionally come from small business and corporate banking where the strength and steady advancement of the economy were factored into the lending equation.
But when things turn bad, banks tend to have a harder time realizing on security and getting full loan repayment from asset liquidation. Banks are also not set up to monitor business operations as closely as asset based lenders tend to monitor transactions versus collecting periodic financial reporting.
The extra steps taken by asset based lenders to manage lending risk creates additional cost which is another reason why traditional asset based lending is more expensive.
But even with a higher cost of financing across the board for most asset based loans, business owners are lining up to pay more for their debt financing requirements. And the reason is quite simple. In many cases an asset based loan is all that’s available at the present time.
From a lender point of view, there are more asset based sources entering the market, especially in terms of private mortgage lenders. As the affluent baby boomers grow older, asset based lending provides an alternative to the stock market with solid potential returns and underlying security to protect the investment.
Because corporate or bank financing has contracted for the time being, asset based lenders are also getting a higher quality deal flow than they would normally expect to see, creating competition among lenders for the better deals.
This has resulted in better pricing for the better deals with asset based rates getting close to bank rates in some cases.
Asset based loans have also become a transition step to the future as well. Any business that has suffered through the recent down turn, is trying to expand for growth, or going through ownership transition is likely going to have to look to an asset based loan in the short term. Once earnings stability can be established, they will look to move to lower cost traditional options.
But in the mean time, even at a higher cost, asset based loans are providing essential capital for business operations.
Click Here To Speak To Business Financing Specialist Brent Finlay
Business Financing