The asset-based advantage Featured

7:00pm EDT February 23, 2009

Companies seeking working capital in today’s economy are increasingly turning to asset-based lending to facilitate their business strategies. Many are finding that an asset-based structure provides the liquidity and flexibility necessary to quickly execute a buyout or facilitate a turnaround plan. In the midst of one of the worst credit crises in our country’s history, asset-based financing is playing a pivotal role in sustaining U.S. businesses.

Gail Bernstein, an executive vice president in PNC’s business credit group, spoke with Smart Business about the advantages of an asset-based loan, given current market conditions, and suggests ways that a company seeking capital through this type of leveraged lending can prepare.

What are some of the advantages to an asset-based loan?

Asset-based financing is often the best option for companies with higher risk profiles. In the past this meant that asset-based lenders were extending credit to businesses experiencing rapid growth, conducting leveraged buyouts or whose profits were seasonal. In the wake of the economic downturn, however, asset-based financing has become more prevalent for companies in distress or those with leveraged balance sheets or companies that may have collateral in several different places. Lenders are more comfortable making a loan when they know there are assets available — accounts receivable, inventory, machinery and equipment, and real estate — if sales and cash flows begin to decline.

Why are these advantages particularly significant during an economic downturn?

Traditional banks assess transactions by a strict debt-to-worth ratio and several other covenants due to internal constraints and federal regulations. During a credit crunch, they become even more cautionary. Asset-based lending is usually not subject to the same limitations because lenders place a greater emphasis on accounts receivable and inventory. The lender determines the value of these assets as the result of a thorough due diligence process.

As part of this process, the lender analyzes a company’s books and records, including accounts receivable and inventory, and appraises fixed assets such as machinery, equipment and real estate. In addition, they may conduct a site visit to see a prospective borrower’s inventory first-hand and meet with senior management. The lender is then able to assess a company’s value, weighing qualitative as well as quantitative factors, and feels more at ease about lending to a highly leveraged company.

What are some of the factors asset-based lenders take into account when evaluating a company?

The fundamentals of lending don’t fluctuate with market conditions for most asset-based lenders serving middle-market companies. As I already mentioned, the quality of the company’s collateral is paramount, but lenders do take other factors into account. Here are just a few of the things you or your company’s CFO may want to keep in mind to help the process along:


  • Maintain detailed accounting data.
  • Implement good collateral controls.
  • Keep audited financial statements versus compiled or reviewed statements.
  • Have a strong senior management team in place.
  • Establish good communication with your lender. Keep your lender up-to-date on your company’s performance and develop an understanding of their current lending strategies. Meet with them regularly to provide business updates and address potential problems or concerns early.

    No one knows what the future will bring, but it’s clear that liquidity will likely remain a problem in the lending environment for the foreseeable future. Although structures may be tighter and pricing may be higher, asset-based financing is relatively stable and will be considered a viable alternative to traditional loans now and in the future.

    This article was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to buy or sell securities or to engage in any specific transactions, and does not purport to be comprehensive. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other adviser regarding your specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors.

    ©2009 The PNC Financial Services Group Inc. All rights reserved.

    GAIL BERNSTEIN is an executive vice president in PNC’s business credit group. Reach her at (626) 432-7555 or