What is Asset-Based Lending?
Asset-based financial services play a vital part in financing the growth and well-being of your company. They provide our clients with cash by lending on fixed assets, accounts receivable and inventory, and engage in factoring, purchase order financing, real estate financing and leasing. They include the asset-based lending arms of domestic and foreign commercial banks, small and large independent finance companies, floor plan financing organizations, factoring organizations and financing subsidiaries of major industrial corporations.
Experts in all facets of collateralized lending, asset-based lending – large or small alike – we possess the experience and know-how to structure the proper financing program for our clients. We specialize in financing businesses and business transactions involving a broad range of products and services, both domestically and internationally. Which provides:
Operating cash Funding for an acquisition, a merger or a leveraged buyout Debt consolidation Turnaround financing Bankruptcy/reorganization financing Equipment financing Inventory financing Floor plan financing Equipment leasing Import/export trade financing Growth financing Factoring services
Growth Money Businesses need money to grow. A business cannot survive just because it has a better product, an exclusive market or the best method of distribution. The catalyst required for progress is money.
Business owners and managers must be knowledgeable about financing, what it can do, why one form may be better than another. It can be used when:
Operating cash is tied up in receivables The best trade terms for supplies create cash flow shortages Inventory levels are high because of client demands Sales growth is straining resources Seasonality peaks cause problems No fixed assets are available for collateral Trade discounts and special pricing terms cannot be obtained Letters of credit are required to supply or buy overseas Debtor-in-possession financing is required
An Asset-based lender often will advance funds when traditional sources are not available. We are familiar with various types of businesses and are responsive to our client needs.
Loan size GFR funds businesses with annual sales less than $250,000 to more than $10 million. Credit depends on the type of business and the content and quality of the collateral. Frequently, the credit granted is more than the net worth of the business.
The increased cash availability provided by asset-based lending often makes the difference between profitable growth and failure for the undercapitalized business.
The phrases “too small,” “too new,” and “not enough net worth,” do not deter an asset-based funding source.
The flexibility and cash availability provided by asset-based financing have enabled countless companies to grow and take advantage of market opportunities.
Cost The cost of asset-based loans is influenced by the credit risk and collateral associated with the transaction. When evaluating an asset-based loan, borrowers should assess the cost of financing in the context of the benefits to be received. Compared with other financing alternatives, asset-based lending is very cost effective and efficient.
Asset-based lending frequently looks beyond financial statements to determine how much money they are prepared to advance at and after closing. Therefore, borrowers can take advantage of profit opportunities in the market by being able to plan ahead based upon their cash availability.
GFR is proactive rather than reactive and can often restructure debt during tough times to help avoid costly and disruptive refinancing.
Over the long haul, the benefits will tend to offset the premiums associated with borrowing from the asset-based financial service company.
Types of Asset-Based Financing
Secured lending Funds secured by the assets of the borrower. The collateral can include: accounts receivable, inventory, machinery, real estate, patents, trademarks or other assets where value can be determined.
A revolving loan may be establish where the borrower provides a pool of collateral that translates into operating cash or working capital. The borrower uses the financing to buy more materials, expand marketing, improve productivity or other improvements and sells the resultant product. The sales create receivables that are pledged for cash advances and the payments received on the invoices pay down the loan. These increases and reductions in the loan balance are cyclical, hence the revolving nature of the loan.
Some receivables have less collateral value, for example, progress billing, past due receivables, and receivables subject to “set-off”. Raw materials and finished goods are normally acceptable collateral, but work-in-progress generally is not. Equipment and real estate may also be used as a source of financing.
Non-recourse factoring: The financing institution buys the receivable and assumes the risk of customer credit. The factor guarantees against credit loss, unlike a secured lending facility. The factor will also check credit, undertake collection and manage bookkeeping functions.
Full-recourse financing: The financing institution accepts assignment of the receivable but does not assume the credit risk. The client retains responsibility for managing the receivable portfolio. Generally, the funder will finance invoices up to ninety days from delivery of goods or services, then charge them back to the client.
Discount factoring: The purchases the receivables at a discount to compensate for paying prior to the due date.
Maturity factoring: The purchases the receivables, assumes the credit risk and advances cash to the client as the invoices mature.
Non-notification factoring: Account debtors are not notified of the sale of the receivables and the invoices are either paid to a lock-box or to the shipper. This is similar to a receivable loan.
Notification factoring: Account debtors are notified of the purchase of the receivables and are directed to make payments to the funder.
Spot factoring: A “one shot” transaction, generally out of the normal course of business. (for more about factoring, Contact GFR.
Floor plan financing: Certain industries require significant high-priced finished goods inventory. Examples: automobiles, refrigerators, washing machines, televisions and stereo systems. These are supplied on extended credit terms to retailers. Retailers usually do not purchase this expensive inventory outright; rather a finance company will provide credit to purchase the inventory, secured by the product “on the floor”.
Leasing: The lessor purchases the equipment needed to fulfill certain obligations and the equipment remains the property of the lessor even after all the borrowed funds are repaid; or existing assets are sold to and leased from a leasing company to release capital needed for working capital purposes.
Purchase order financing: Working capital financing is secured by a security interest in existing purchase orders and the proceeds of the purchase orders. Normally the security interest is perfected by the lender taking possession of the inventory or raw materials.
Real estate financing: the mortgaging of land and/or buildings to raise working capital.