Asset Based Lending Enjoying A Renaissance

by Timothy Jacquet, Senior VP of Apple Capital Group, Inc.

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.
Asset Based Lending Enjoying A Renaissance
The Asset Based Lending Renaissance Should Continue
As businesses, large and small, contribute to the recession recovery, asset based loans should continue to be a valuable source of working capital. The operational and financial flexibility offered by asset based loans remains an important component to the renewed popularity of this financing option.

Traditional commercial lenders target cash flow and credit rating as primary components of loan decisions. A bank’s first concern is a borrower’s ability to repay their financing. Strong cash flow offers that repayment ability. A wonderful track record of paying debts displays the borrower’s willingness to repay.

Asset based lenders, however, exchange the cash flow and credit score priorities for the leverage offered by quality asset values. The worth of equipment, accounts receivable and/or inventories, in lieu of cash flow, are primary decision criteria. By structuring deals that require the borrower to maintain a “cushion” of additional assets, asset based lenders enjoy collateral (with backup available lien-free security), higher than market interest rates, whether stated (loans) or imputed (leases or receivables), and relatively fast maturities.

Even the required extra asset “cushions” are becoming more borrower-friendly. Historically, businesses had to verify that they had additional unencumbered assets of around 25 to 30 percent of the security for the financing amount they desired. In recent years, borrowers need only verify around 10 to 15 percent asset “cushions.”

The changing view of asset based lending sources, no longer perceived as lenders of last resort, has fueled the asset based lending renaissance. When combined with the seemingly industry-wide decision of the banking community to be “spectators” and not “players,” the market has accepted asset based lenders as viable options for working capital funding.
Asset Based Lending Enjoying A Renaissance
The inherent downsides of asset based lending, higher interest rates and collateral that can be seized and quickly converted to cash, pale in comparison to the potential damage to a business generated by a lack of working capital. Borrowers can even improve the interest rate level by offering quality and liquid assets. For example, offering accounts receivable under 90 days that, after lender due diligence, include longer-term customers with a good track record of payment, can generate lower interest rates and loan-to-values up to 80 percent of outstanding balances.

The asset based lending renaissance should stay strong and may continue to grow. While most banks are overloaded with cash, because of their spectator status, management shows no initiative to return to commercial financing at traditional levels. Always borrower candidates, small businesses will continue to favor asset based loans to provide working capital, as a more cost-effective option to credit cards or hard money financing another way Asset Based Lending Enjoying A Renaissance.

This renaissance also involves some major bank lenders. For example, Wells Fargo, Bank of America and JPMorgan Chase continue to make asset based loans, even with their traditional commercial lending operations in stasis. Lesser known, but growing institutions, such as TD Bank, have now focused on asset based loans as a profitable lending strategy – Apple Capital Group and other like them are now in the fore front of asset based lending.

This data projects brighter days for borrowers and asset based lenders. Always a good “marriage” for small businesses with sketchy credit, asset based loans have now become the new mainstream for companies of all sizes. Asset based lending is one of the few factors making a positive difference in a recovery from the recent recession. Asset based lending is truly enjoying a renaissance in the commercial lending world and is not only an alternative in financing for some business, sometimes is this their only option. Thank you for reading this white paper on asset based lending and if you have any questions, please do not hesitate to reach out to our company Apple Capital Group, Inc., we would be more than delight to assist you. Asset Based Lending Enjoying A Renaissance

Check out our daily business talk on Blog Talk Radio Network called “The CORE Business Show with Tim Jacquet.” Here is the link: or check out our small business blog at

Apple Capital Group, Inc.
10151 Deerwood Park Blvd
Bldg 200 Suite 250
Jacksonville, FL 32256
Phone: 904-647-3222
Click here for a copy of this article!