Asset-Based Lending for Small Business

Despite the slowly improving economy and somewhat successful efforts by the federal government to jump-start business lending by community banks, most business owners will tell you it’s still quite difficult to obtain financing these days.

In this tight credit environment, the role played by asset-based lenders has increased exponentially. “They’re a vital cog in the economy right now,” says Michael Miller, a director with CFO 911 in Playa Del Rey, Calif. “I can’t imagine what the economy would look like right now without them.”

Jennah Purk, president of Purk and Associates in St. Louis, says she regularly refers clients to asset-based lenders, because, “The credit crunch has taken a difficult situation and made it impossible.”

Asset-based lenders offer creative business financing solutions to companies that don’t qualify for traditional bank loans and credit lines due to their startup status, rapid growth, or financial ratios that don’t measure up to a bank’s requirements. These solutions typically include asset-based loans, accounts receivable financing, and factoring.

In 2009 factoring companies provided $140 billion in financing, up slightly from the year before, reports the Commercial Finance Association. Total outstanding asset-based loans increased 1.25 percent in the fourth quarter of 2009.

“Banks today have reverted back to a 1980s and 1990s model with regard to financial ratios,” says Albert Christiansen, a partner with B2B CFO in Phoenix. “That’s why asset-based lending is so important right now. There are many companies that can’t meet a bank’s lending criteria, but they need to keep their cash flowing.”

Larry Potashnick, chief executive officer of Capital Performance in St. Louis, concurs. “Bank underwriting guidelines are getting tighter and tighter. The good thing about asset-based lenders is that they’re able to plug a pretty big financing gap that exists right now [for] businesses that aren’t quite creditworthy enough to borrow from a bank but still need critical working capital in this tough environment.”

Manufacturers and distributors with creditworthy customers are often good candidates for asset-based loans and factoring, says Purk, because the financing is based on receivables, not inventory. “Most of my clients who have done this kind of financing have been light manufacturers that were startups or where the owner didn’t have sufficient personal assets to pledge as collateral. Banks don’t want to repossess a warehouse full of steel plates, car parts, or frozen eggrolls, but an asset-based lender can convert accounts receivable to cash quickly, and cash is king.”

Christiansen tells of a distributor with a strong business model and a good understanding of its market that needed a cash flow boost to weather the economic downturn. “The company got financing from an asset-based lender that provided the working capital necessary to keep going. They grew from about $7.5 million in revenue in 2008 to $10 million last year, and they should hit $13 million in 2010. This growth would have been impossible without asset-based lending.”

Asset-based lenders can also help companies that have bank loans or lines of credit but need additional short-term working capital to take advantage of opportunities, like an unexpected large order. “It can be hard to get a credit-line increase in this environment,” Miller says. “Too many companies aren’t aware of how asset-based lenders can help them in situations like these. I’ve referred many clients to asset-based lenders and will continue to do so.”

Asset-based lending is often used just temporarily, to provide much-needed working capital during a startup or transition phase until a company has enough financial history or a strong enough balance sheet to be “bankable.” Purk says banks usually want to see three to five years’ worth of financial statements from potential borrowers.

“Asset-based lenders serve a clear need in the marketplace right now,” says Christiansen. “Some of my clients have improved their cash flow greatly by taking advantage of these types of financing.”

Tracy Eden is national marketing director for The Commercial Finance Group in Atlanta. CFG provides factoring and accounts receivable financing to companies nationwide. Contact him at tdeden@cfgroup.net or visit CFG to learn more.