What are the benefits and risks of asset-based loans?
The primary benefit is that these loans are usually granted to companies that might not receive other financing. There is also less concern about the company’s operating results, since most of the focus is on the change in assets that determine the loan value.
The disadvantage is that the loan is tied to just those account balances. So if the company’s need for working capital or permanent financing is greater than what might be advanced under an asset based loan arrangement, it may be difficult to obtain that additional financing. These loans are also tightly structured under a strict formula, based on certain criteria of qualifying accounts. For example, if a certain portion of accounts receivable is more than 90 days old, the entire account may be excluded from qualifying. There’s no ability to negotiate or change that. If an account kicks past 90 days old, the company is going to lose the benefit of that account in its collateral base.
What should you expect during an asset verification audit, and how can you prepare for this?
It’s the same as preparing for a mini year-end audit. You need to communicate with the auditor when he or she contacts you about the records that are needed. You need to be organized and have those records available when they arrive.
Provide the auditor with a place to work on-site and be available while he or she is there to quickly answer any questions that may arise. The worst thing is to be tied up in meetings during the verification, and the auditor can’t get to you to get questions answered. Try to schedule it away from your normal monthly close, so you’re not busy with that project. The verification usually takes between two to four days to complete for an average size company.
Where do you see the credit environment heading in the future, and how can you prepare for this?
Hopefully we’ll return to a more stable lending environment, so the economy can begin to grow and fully recover. I do not expect the pendulum to swing all the way back to before, where lenders were very aggressive. But surely they’re going to have to become more aggressive than in the past year.
Companies will also need to obtain working capital in order to grow, and not all companies will be able to self-generate this money. These companies will be looking to lenders to help provide them with that working capital to fund their growth.
Paul R. Anderson is the director of assurance services at GBQ Partners LLC. Reach him at (614) 947-5203 or [email protected].
