Once considered the “ugly stepsister” of commercial finance, asset based lending is enjoying a major renaissance, coming back to prominence with a splash. While calling this a “rebirth” may be a bit dramatic, asset based lending is doing quite well, thank you.
During the recent recession, businesses, large and small, became asset-rich, but working capital poor, as revenues declined. With traditional bank commercial loans reduced to a slow trickle, companies endured working capital shortages. Enter asset based lending to save the day. Businesses with equipment can turn these assets into working capital with asset based financing. Offering this equipment as collateral for asset based loans to a veteran lender eliminates classic financing criteria requiring superior cash flow and outstanding credit.
The difference between asset based lenders and traditional bank financing cannot be overstated. When reviewing an asset based loan request, the lender targets collateral, not the borrower’s credit history. This feature fueled an 8.3 percent increase in Asset Based Loans since 2008, escalating up to $600 billion. Observers, like the Commercial Finance Association, predict future double-digit increases. Other respected asset based loans trackers, such as Dealogic, Inc., report that, with traditional commercial lending down almost 39 percent since 2008, the volume of asset based loans should continue to remain strong.
As usual, asset based loans garner little attention by the mainstream financial press. However, asset based loans remain a bedrock of commercial lending as they have for decades. Asset based lending may not flash with the glamor of billion dollar revolving lines-of-credit to Fortune 100 corporations. However, to smaller businesses everywhere and asset heavy companies of all sizes, Asset Based Loans has been a lifeline to success, sometimes survival
While the primary market for asset based lending has been retail and wholesale companies, with their high levels of accounts receivables and inventories, there are many additional significant borrowers, including the natural resource industry. For example the oil, gas, metals, and mining industries accounted for around 23 percent of the asset based lending volume in 2011.
Some Reasons for this Renaissance for Asset Based Lending
Finding positives from the recent deep recession is challenging. However, asset based lending is one of the few loan-related areas that enjoyed success. With banks and most commercial lenders “standing on the sidelines, refusing to get into the game,” asset based money sources have become even more influential financing players.
Moving from a lender of last resort to a lender of first resort is not necessarily an easy or pothole-free journey. However, the expertise of veteran asset based lenders fueled this renaissance. Using an asset based loan helped many businesses survive and prosper during the down economy. Using their equipment, property or accounts receivable as security, businesses are able to generate the working capital they need.
Asset Based Lending Enjoying A Renaissance
Along with the many smaller businesses that represent the foundation market for asset based loans, asset based lenders have attracted major organizations, such as Georgia Gulf, Hertz, Del Monte, Sears, Neiman Marcus, and Liz Claiborne recently. What does this tell you? These corporations, formerly enjoying “red carpet” treatment by low interest national lenders have discovered that an asset based loan can achieve the financing and operational goals they crave.
The additional challenges of receivables management generated by the recession have also spawned the record setting volume asset based lenders fulfilled in 2011. Among the more than $27.5 billion financing were a rebirth of refinancing deals. While asset based lending typically comes with higher cost than traditional bank financing, the interest rate and fee “gap” has become insignificant when compared to the lack of traditional bank financing. Asset based loans play an crucial role in keeping working capital funds flowing….
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