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:
versus compiled or reviewed statements.
team in place.
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
[email protected].
