How asset-based lending can assist growing companies

Asset-based financing can help businesses get critical funding when traditional lending avenues might not be available.

“Perhaps they don’t have a strong balance sheet or good leverage. Maybe they have liquidity issues,” says Christopher Hill, senior vice president and team leader of the Capital Finance Division at Bridge Bank. “There are ways to structure a facility to meet their working capital needs.”

Smart Business spoke with Hill about the various products available to provide working capital to growing companies.

Is asset-based lending primarily for companies in growth mode that may not have enough in established revenues to the point where they can get traditional loans?

Exactly — they don’t have three years of profitability or Tier 1 venture capital funding. These companies may have hit a few bumps in the road. Or they were bootstrapped, and never had outside equity. Now they’re hitting their stride, but that lack of equity capital has caused them to miss out on business opportunities.

What they can do is have a facility specifically structured to help them reach those goals.

For example, a computer company calls and needs additional funding quickly because it has a backlog of $15 million worth of orders. In order to complete these orders, the company needs working capital. With the right bank relationship in place, the company could then obtain working capital via a vendor assurance program, which is similar to purchase order financing.

What types of financing are available through asset-based lending?

There are several types of financing available including accounts receivable financing, inventory financing, export financing and factoring.

Factoring is typically a no-covenant solution for companies that may be finding it difficult to secure other financing solutions. Lenders typically look for sustainability in a factoring situation because ultimately they’re underwriting to the account debtor as opposed to the client.

Financing is done invoice by invoice, rather than looking at account debtors in aggregate. Lenders purchase or finance specific invoices.

Factoring may have higher costs due to the increased risk structure of this type of financing, but it allows companies that might not fit into ‘traditional’ solutions to still be able to run, and even grow, their businesses.

What other alternatives are available to companies needing these types of financing?

They could go back to investors or friends and family for more capital. But owners often don’t want to dilute their equity in the firm. And, compared to a bank facility based on prime, for example, the cost of raising equity could be greater.

But the ability to penetrate into various asset classes means that a bank financing solution can usually be found.

If a company doesn’t have enough accounts receivable, a facility may be structured based off of the strength of a personal guarantor.

Asset-based financing can work for companies that are three months old to those that have been around 15 years and gone public.

Sometimes companies get comfortable with certain products or the products work really well for them because they don’t want a covenant that they have to report to their board every quarter.

But for companies that are three months old, asset-based financing can provide tremendous benefits.

One of the tradeoffs of this type of lending is that there is more monitoring involved in order to manage risk. It does require some work on the client’s part, but it’s a very valuable tool for the development of their businesses.

Christopher Hill is senior vice president and team leader of the Capital Finance Division at Bridge Bank. Reach him at (408) 556-8635 or [email protected].

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