Many businesses today are looking for loans that can help
their businesses advance in a market where credit standards are
tighter than they have been in recent
years.
During good or bad times, asset-based loans allow companies to leverage their assets to obtain the cash they
may need, according to Mark Seryak,
the vice president of asset based lending at FirstMerit Bank. Asset-based
loans are a working capital finance
option available to business owners.
Smart Business spoke with Seryak
about the benefit of asset-based loans
in today’s trying market and how business owners should prepare to apply
for such loans.
How does an asset-based loan work versus
a traditional loan?
An asset-based loan is structured
using the value of the borrower’s collateral as opposed to financing that is
primarily based on the borrower’s
cash flow and overall balance sheet
leverage. Because the conversion of
collateral (accounts receivable and
inventory) is the primary source of
repayment, a major characteristic of
an asset-based borrowing structured
loan is the emphasis on monitoring the
collateral.
Asset-based loans have the potential
to provide a business with greater liquidity because the loan advances are
based on the current level of the company’s working capital assets. These
loans may be ideal for companies that
are fast-growing or undercapitalized
and need assistance to finance their
working capital assets.
Have lending standards changed for asset-based loans?
In general, the lending and credit
markets have changed dramatically this year with the failure of some
major financial entities. This means
that the scrutiny has increased for
business loans. More and more banks
are implementing some form of asset-based structure in the loans they are
offering businesses.
On-site field exams are conducted by
the bank to determine the advance
rates on the collateral and other terms
of the loan. Field examiners will
review the accounting records, verify
the account receivables and review
the systems and procedures for
recording and tracking inventory. This
allows for a detailed and hands-on
review of the company in addition to
the traditional financial overview.
How can businesses prepare to apply for
asset-based loans?
Accurate accounting records are
critical in the bank’s ability to evaluate
the quality of a company’s working
capital assets. The accuracy and timely completion of financial records are
essential to the bank obtaining a level
of comfort with a company’s collateral
and financial reporting. The borrower’s ability to provide financial data
and collateral supporting schedules in
an electronic format can greatly speed
up the bank’s due diligence process.
This leads to a quick response to the
borrower and ultimately to better
understanding of the borrower on an
ongoing basis.
What types of business are best suited for
asset-based loans?
Typical asset-based borrowers are
heavily invested in working capital
assets. These companies can be experiencing high growth or have seasonality in the business cycle.
Other candidates include turnaround
situations, leverage buyouts and ownership transitions.
Are there any drawbacks to asset-based
loans of which business owners should be
aware?
Asset-based loans typically provide
more borrowing capacity for a business. There are incremental costs for
asset-based loans for field exams and
monitoring fees. However, interest
expense is minimized because the
loan is repaid daily as accounts receivable are collected and borrowing only
occurs when checks or other items are
presented for payment.
MARK SERYAK is the vice president of asset based lending at FirstMerit Bank. Reach him at [email protected] or (216) 802-6591.
