Important Factors that Asset-Based Lenders Consider for Providing Financing

One of the first questions we are asked by a prospective borrower is, “How important is my credit?”  With rare exceptions, the answer from us is, “It isn’t.”  People are used to buying car or houses or applying for a credit card or a bank loan where the most important question is, “What is your credit score?”  Now that banks and other ‘traditional’ lending institutions are hoarding their TARP money and turning down loans, the credit market is a different and oftentimes unfamiliar territory for borrowers.  During the economic boom of 2004 to mid-2008, business owners were courted by many banks and offered extremely low rates and had to offer very little collateral other than their personal guarantee, but now they are seeing their credit lines slashed and many are being asked to repay the bank and leave.  Business owners are turning to alternative financing options, including asset-based lending, and they are learning that the rules are different.

Here are the factors that lenders consider when providing financing in the order of importance:

1.      Value of the collateral:

a.       Accounts Receivable: Credit strength of the customers who owe the money

b.      Inventory: liquidation value (greatly depressed in the current market due to a glut of unsold goods)

c.       Equipment: liquidation value (greatly depressed in the current market due to a high amount of repossessed equipment from failed companies)

2.      Repayment

a.       Can the borrower afford the interest expense?

b.      Are there any secondary sources of repayment if the company is unable to repay the loan? Example: sale of owner’s assets.

3.      Strong financial potential for the borrower

a.       The future is more important than the past. The borrower may have been losing money for the last 2 years, and if they have, then what is the turnaround plan for improving profitability to achieve break-even?

b.      How will the money borrowed improve the financial stability and performance of the borrower?

4.      Ownership and management team

a.       Management team’s experience

                                                              i.      If there is a turnaround required, does the management team have turnaround experience?

                                                            ii.      Do they have a credible plan for moving forward and are they implementing it?

b.      Strong Personal Financial Statement for owner

Believe it or not, financing is still out there, but it may be different than what you are used to.

Get business financing when you can, not just when you need it

Today I received a call that is becoming an increasingly common occurrence.  A company that turned down financing six months ago because they felt that they didn't need it yet, called and said they need money by the end of the week or they would probably have to shut the doors.  This is NOT an enticing opportunity for any lender, nor is it a realistic expectation for any borrower.  The company owes a bank and various vendors, and is unable to cover payroll because their customers are taking too long to pay them.   The company had strong sales growth and money was flowing in a few months ago, but Accounts Receivable collections went from 30 days to 60 days, and at $1 million of sales per month, this created a $1 million cash shortfall very quickly, even though sales are still solid.  Their decision to forego financing six months ago when they did not feel any urgency has effectively put the future of their company in jeopardy.  
It is possible to set up a credit facility without a monthly minimum, so the company will not incur fees until they actually borrow the money.  With a funding facility preapproved, the company can receive funds within 24 hours from making the request, even if the request is not until six months after initial approval.  
I hope that business owners will learn quickly that in this tight credit market, it is better to have financing in place when they do not have the immediate need, even if it is not being used, so they have money available to them at a moment’s notice when it is needed.