Asset-Based Lending

Banks & Private Equity Partners

Investment CapitalTraditional Bank Lines

Alternative Lenders

FactoringPO Financing

Asset-Based Lending

Early Stage Capital

Seed CapitalFriends & Family

Early Stage Investment

Ma

ture

Mid

-Sta

ge

Sta

rt-U

pFinancing Spectrum

What is the difference between an Asset Based Lender and a

Bank?

• Banks • Cost of funds is lower than ABL, due to less risk • Focused on financial strength vs. collateral• Positive earnings history often required • Personal collateral may be required

• Asset-Based Lender • Focused mainly on collateral and future cash flow • More reporting is required to manage the risk in an ABL• Real time monitoring of collateral • Higher rates on ABL deals• Confirmation process to verify receivables• A/R collections go to lock box

Bank vs. Asset-Based Lending

Factoring

What is Factoring?

• The selling of a client’s accounts receivable to a factor in order to obtain funding.

Factoring

How does it work?

• Factor makes a credit assessment on the payer• The client notifies the payer that the account has been assigned to factor• The client submits invoice, PO, and proof of performance to factor to fund• Factor verifies the delivery of product or service• Factor advances up to 90% of invoice amount• Upon payment, factor collects principal and fee and refunds balance (rebate) to client• May be either recourse or non recourse

Factoring

What are the qualifications to factor?

• Sell to creditworthy payers

• Accounts receivable are fully earned

• The accounts can be confirmed

• There are no prior liens on accounts receivable or inventory

Factoring

What are the pros and cons of factoring?

• Pros:

• Ease of qualification

• Fast access to cash after billing

• Credit and collection services

• Insure accurate billings

• Cons:

• Factor will be in frequent contact with payers

• Expensive relative to bank financing

• May involve future volume commitments

Asset-Based Lending

What is asset based lending?

• A more traditional line of credit, closely monitored by the lender, that provides funding based upon the current level of accounts receivable and inventory

• The level of lender monitoring and control falls between that of factoring/PO finance and traditional lending, and cost fits into the same spectrum as well

Asset-Based Lending

How does ABL work?

• The lender performs a field examination of the client to confirm the collateral value and clients ability to report accurately

• Collateral values, and therefore borrowing availability, are tracked perpetually using a borrowing certificate

• Availability declines when accounts are collected and increases when sales are made and inventory is purchased

• Monthly financial performance is monitored and quarterly field examinations of accounts and inventory are performed

Asset-Based Lending

Qualifications for ABL

• Satisfactory accounts receivable. Creditworthy customers and a good collection history

• Satisfactory inventory. It must be marketable in its current condition• Reliable collateral reporting systems• Financial statements must demonstrate viability• Lender must feel confident that cash can be directed into the lockbox

Asset-Based Lending

Pros and Cons of ABL

• Pros:

• Clients are able to borrow on inventory. Advance rates vary, usually in a

range of 30% to 50%

• It is less expensive than factoring or PO financing

• It is more traditional than factoring or PO financing, less possible stigma

from end-users

• Cons:

• Fixed administrative costs: field exams, commitment fee, documentation

charges and lockbox charges

• More reporting requirements and controls than traditional lending

• May involve fee to exit

Who Provides Asset-Based Financing?

Factoring

• Very fragmented

• Lenders are starting to provide both

Asset Based Lending

• Finance Companies below $2,000,000

• Banks and finance companies above $2,000,000

Thank You

Toby Dahm

Senior Vice President

Hennessey Capital

248.658.3208

tdahm@hennesseycap.com

Learn more at HennesseyCap.com