44 February 2013

A New Jersey BusiNess speciAl FeAture

Learn the efficiencies and cost advantages of this financing method.By Kevin Berrigan, Contributing Writer

The Benefits of Asset-Based Lending

In a still tepid economy, many New Jersey companies and large corporations are turning to alternative sources of funding such as asset-based lending (ABL), to finance their day-to-day operating expenses, or obtain capital for restructuring, turnarounds, mergers and acquisitions and buyouts.

In its simplest form, ABL is any kind of lending se-cured by an asset. This means, if the loan is not repaid,

the asset is taken. In this sense, a mortgage is an example of an asset-backed loan. More commonly, however, the phrase is used to de-scribe lending to everything from small, entrepreneurial and start-up businesses, to large corporations using assets not normally used in other loans. Typically, these loans are tied to inventory, accounts receivables, machinery and equipment.

A Publication of the New Jersey Business & Industry Association

New Jersey Business 45

At Wells Fargo, eligible collateral also includes real estate and a strong brand as assets to consider. “If you have a strong brand, we would ap-praise the brand and make an asset-based loan on its value,” according to Scott. D. Ryan, managing director of capital finance at Wells Fargo. Other types of assets could include contracts with recurring revenue.

Since both accounts receivable and inventory are renewed throughout the year at periodic intervals, however, they are in the favored classification of eligible collateral. “They are just easier to value,” Ryan says.

Asset-based lines of credit are main attractions in today’s competitive busi-ness world because of an increasingly flexible loan structure at an attractive price with fast and steady funding pro-visions, he continues.

John DePledge, senior vice presi-dent, head of business development, for the asset-based lending group at TD Bank, agrees. “Since ABLs supply a continuous flow of cash by means of revolving lines of credit, ABLs provide financial support and stability to the day-to-day operations of commercial borrowers. In most cases, each bor-rowing company’s credit line is deter-mined by the combined worth of its assets,” he says.

In many cases, businesses that use ABL as a funding source are under-capitalized companies that have good performing receivables and are grow-ing faster than their cash flow intake, says Brian Cove, COO at Commercial Finance Association (CFA) in New York City. Founded in 1944, the CFA is the international trade association dedi-cated to the ABL and factoring indus-tries.

Often, asset-based lenders such as Wells Fargo, TD Bank and regional banks provide asset-based loans when the normal routes of raising funds, such as the capital markets (selling

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46 February 2013

>>>the BeNeFits oF Asset-BAsed leNdiNg

bonds to investors) or normal unse-cured or mortgage-secured bank lend-ing is not possible due to a company’s shallow sales history or restructuring situations, DePledge says.

“Asset-based lending has experi-enced modest growth from the depths of the recession,” he adds. “Asset-based lending is used by many types of busi-nesses that understand the efficiency and cost advantages to an asset-based loan structure.”

According to the CFA, New Jersey ranks eighth in the United States and third in the northeast for businesses that use asset-based lending to finance their operations, Cove says. Nation-ally, only California, Texas, New York, Illinois, Florida, Georgia and Pennsyl-vania ranked higher.

With nearly 300 member compa-nies and 16 chapters located through-out the United States, Mexico and Canada, CFA members include a di-verse collection of lending institutions that range from international banks to independent entrepreneurial finance companies.

As of 2011, New Jersey had 264 businesses taking advantage of ABL funding packages in a broad range of industries, including retail, food, IT, healthcare, pharmaceutical and tex-tiles, with the majority being small and mid-sized businesses, according to a report compiled from information pro-vided by the CFA’s 25 largest member organizations, Cove says.

He also says that ABL appears to do equally well during an expanding or contracting economic climate, but es-pecially in a stagnant economy.

“During an economic downturn, banks tend to tighten their commercial loan belts, while asset-based lending continues to be popular because the lender bases the loan on the value of the collateral and uses a different cri-teria than a commercial loan officer,” Cove says. “Its flexibility and monitor-

ing policies make it appealing for both borrower and lender. An asset-based lender will value the collateral, moni-tor the collateral and claim it if the bor-rower defaults. Asset-based lending is a very disciplined funding source which makes it easier to lend when times are tough.”

Wells Fargo confirms the CFA view-point. “Amid an uncertain economic

climate, like our current economy, as-set-based lending tends to flourish be-cause it is more consistent than com-mercial loans,” Ryan says. “The CFO of a company can sleep well at night be-cause he or she has the comfort to run the business without worrying about the ever-present fluctuations of the business cycle.”

Unlike traditional bank debt that relies heavily on balance sheet ratios and cash flow projections as loan cri-teria, asset-based lenders will evaluate a client’s business assets as its primary focus to establish the borrowing base. The result is usually far greater borrow-ing power than can be achieved from a traditional cash flow banking ap-proach or commercial loan, DePledge says.

Asset-based lenders such as Wells Fargo or TD Bank assign a business a revolving line of credit based on a per-centage of each of the qualifying asset classes. The business can draw on the line of credit whenever needed and pay back to increase availability for fu-ture use. “You only pay interest on the funds you’ve drawn down so, overall, it’s less expensive than a term loan,” Ryan says. Both Wells Fargo and TD Bank charge an average annual ¼ per-cent unused line fee for the balance of the loan which has not been used.

ABL institutions typically perform an evaluation of the prospective cus-tomer’s assets to determine the ap-proved amount of revolving funding. A common approved advance amount on the borrower’s accounts receiv-able collateral is 85 percent of the total value of the receivables, according to Ryan. Often, DePledge says, at least up to 65 percent of inventory value will be approved as a lending amount against the value of the inventory.

The majority of businesses seeking financing today qualify for monetary advances of between $5 million and $2 billion. The prevailing interest rate

John DePledge, of TD Bank, says, the bank “definitely

wants to grow its asset-based loan business because it’s

another lending product that lets us showcase ourselves as

a thought leader and valued advisor.”

Brian Cove, of the Commercial Finance

Association (CFA), says that, based on association data,

New Jersey ranks 8th in the United States and 3rd in the

northeast for businesses that use asset-based lending to

finance their operations.

New Jersey Business 47

at Wells Fargo for asset-based loans is 1.5 percent to 3 percent. Normally, the capital finance group’s customers need to generate total revenue between $10 million to $20 billion to be considered for an asset-based loan.

As long as a company maintains a certain amount of liquidity/availability in its business operation, it is common for borrowers not to have financial covenants tested, Ryan says. “For ex-ample, if a company has a $40-million credit facility and it has $8 million in liquidity/availability, it often will not have to worry about meeting specific financial metrics (e.g. financial cove-nants) until that number drops below $8 million,” he says.

TD Bank offers many different funding packages which cover lower, middle-market domestic customers as well as multi-billion-dollar, multi-national customers. TD Bank, which provides asset-based loans to a signifi-cant number of New Jersey businesses, makes available asset-based target loans that range from $15 million to $350 million and focus on middle mar-ket and large corporate borrowers. The bank’s interest rates for asset-based loans range from 1.75 percent to 3 per-cent.

“If we were to value a company’s assets at $18 million, we may be in-clined to offer an asset-based loan from $20-$25 million to allow room to help the company grow or to weather the seasonal ups and downs of the business,” DePledge says. “TD Bank definitely wants to grow its asset-based loan business because it’s another lending product that lets us showcase ourselves as a thought leader and val-ued advisor.”

Frequently, a business signs a multi-year asset business loan because it doesn’t want to have to renegotiate the loan each time it needs additional funding. “That is why we may approve a loan amount higher than the value of

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48 February 2013

>>>the BeNeFits oF Asset-BAsed leNdiNg

the collateral,” DePledge says. “It’s done for efficiency to provide the borrower with flexibility for growth and to ac-commodate the borrowing needs of the business.”

DePledge believes one reason asset-based loan pric-ing is lower than cash flow lending or commercial loans is because losses are generally insignificant for the lender due to the enhanced reporting requirements concerning the assets. Therefore, the borrower is able to get a better rate on the loan.

“Due to the robust reporting requirements, the asset-based lender is able to keep his finger on the pulse of the business environment and react to problems that may occur more quickly than the middle-market loan envi-ronment,” he says.

Wells Fargo provides asset-based loans to 75 compa-nies in the Garden State that run the gamut from small and mid-sized businesses to large corporations in indus-tries such as manufacturing, transportation, logistics, retail, distribution and retail industries. At press-time, it

has 15 prospective New Jersey businesses seeking asset-based funding.

There are also very few instances when assets actually have to be claimed, according to DePledge. “The asset-based loan class performed very well in the recession,” he says. “As a result, there have been few instances where TD Bank had to recover its loan by realizing against the assets. Traditionally, asset-based loans have a low loss history and adequate returns.”

At one time, asset-based loans were the last avenue of business financing possibilities, DePledge says. Yet to-day, they are one of the more frequently used methods of funding for companies lacking an operational track re-cord or acceptable credit rating. Especially for young and growing businesses, asset-based financing is often the best available option. “The product has developed over the past 30 years since I have been in the business,” De-Pledge says. “It does not have a negative stigma as it did in its early days.” NJB