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

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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

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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

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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

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Too often business owners and managers get overly focused on their ideal form of financing versus what’s available to them in the time they have.

A good example is the current situation in 2010 where many businesses are starting to see a return to more normal business patterns as we get to the back side (hopefully) of the current recession, but they lack the working capital resources to take advantage of available opportunity.

But because last year was challenging, they not only have weak financial statements to work from but also potentially strained working capital and credit due to needing to cover cash flow short falls over the last 12 months.

And even though they may have never experienced an off year before, they still may not be able to secure incremental working capital from their bank or move to another bank to gain access to a different source of capital.

But what is likely versus what they are focused on can be two completely different things.

This is where having a basic understanding of how business financing works can be so critical to your business.   In times when a dog won’t hunt, its better to not go hunting, or take a different approach.

Lately I’ve been getting a rash of very predictable phone calls for this time of year from business owners frantically getting nowhere trying to secure additional funding with a weakened financial profile.

Is it possible to secure incremental financing or refinancing at prime plus rates in a weakened financial position while we’re still within in this more conservative recessionary lending period?

Yes it is.

Is it probable.

No it’s not.

There’s the famous Albert Einstein quote that the definition of insanity is doing the same time over and over again and expecting different results, which could have been written about business owners not understanding how to go about securing business financing at any given point in time.

Taking it even one step further, even if it were possible to secure your ideal financing in less than optimal lending circumstances, can this be accomplished in the time you have?

What good will it do to get the optimal commercial financing in place if you’ve missed the boat on solid business that could have helped you get back on track or at least generate some positive cash flow during the last 6 months of unrealistic money shopping?

When there is no financing contingency in place, and additional cash is required sooner or later to take advantage of opportunities or keep the balance sheet from further deterioration, the best capital to go after is capital that can be secured in the time required.

Once you get into this mindset, its not about getting the best potential deal, its about minimizing the costs associated with the most probable deals.   And the most probable deals are likely going to be asset based with higher costs.  They will also be bridge loans in that you’re not going to want to pay higher financing rates any longer than you have to.

Once you get focused on financing options that work with your capital needs and time requirements, the exercise becomes picking an option that you’re going to be able to afford even if the best case scenario is breaking even.

Remember, this is a short term fix because you believe better days are ahead.

But if business owners refuse to adjust their financing expectations for any point in time, they may not only descend into madness, but insolvency as well.

Click Here To Speak With Me Directly About Your Business Financing Requirements.

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There are a whole number of ways you can get into special loans, the most common is when you’re offside with one or more of your loan covenants.  But even if you’re onside with everything, the bank doesn’t have to have a reason as these loans are typically made on the condition that repayment can be demanded at any time.

So, regardless of how you got there, the bank has stamped special loans on your forehead and are either trying to squeeze the cash out of you drop by drop, or have set some sort of deadline (typically between 30 and 90 days) for repayment to occur before they start realizing on security.

So what are you’re options?

If you’re truly not offside or only marginally offside on your covenants, you could potentially go to a competitive bank that is currently interested in your business profile and industry.

The first challenge with that approach is that other banks are going to think there is something more seriously wrong to warrant the special loans tag, so they may not give your request any serious attention.

The second challenge is that even if they are interested, they may not be able to move fast enough to assess your application and get financing in place before your bank starts trying to realize on security.

A bank refinancing request for several million dollars can take 60 to 90 days, or more to complete, depending on the assessment process required and the conditions that need to be met.

So, when pressed for time, and requiring a higher probability of success, many businesses turn to asset based lenders.

For service companies that may only have accounts receivable to offer up as security, factoring becomes the only viable option in terms of speed and predictability.   But to even make this work, there will need to be enough margin to cover the higher cost of financing.  While a bank line of credit can be right around prime, factoring will run at 1.5% to 2.5% per month.

For businesses that have physical assets, there are more options to consider.

With real estate, it still may be possible to get an institutional lender to provide financing at similar rates to the ones being paid out, provided that there is a recent appraisal and environmental audit completed.

If time is of the essence, then private real estate financing may be arranged at 65% loan to value and interest rates around 10%.  There typically is only one year terms on this type of money, so you’re basically signing up for a one year bridge loan before refinancing will be required again.

Equipment refinancing will likely be based on a percentage of forced liquidation value with rates in the lower to mid teens.

If  the business has a high investment in accounts receivable, inventory, and equipment, then a working capital form of asset based loan can be arranged utilizing all short term assets as security at rates from 18% per year to 30% per year.

And for any asset based solution, there are likely going to be lender fees to pay as well, making the exercise more costly.

If you spend too much time trying to secure a cheaper financing solution for refinancing, you could run out of time and potentially be out of business.

Bottom line, you want to avoid the special loans tag at all costs.  A fast refinancing, if possible, is going to be expensive, and destroy a lot of value in the process.

Yes, every one wants the lowest cost financing, but lower cost financing is not only low risk, but very fickle as well, especially during economic down turns.  And everything is set up so the plug can be pulled at any time.

Click Here To speak to me directly about business financing

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