Asset Based Lenders:
Serving a True Need in Today’s Marketplace

By Tracy Eden

Most business owners will tell you that it’s still pretty rough-going out there when it comes to obtaining financing. This is true despite improvements in the economy and efforts by the federal government to jump-start business lending among community banks.

In such a tight credit environment, the importance of the role played by asset-based lenders has increased exponentially. “They are a vital cog in the economy right now,” says Michael Miller, a director with CFO 911 ( in Playa Del Rey, Calif. “I can’t imagine what the economy would look like right now without them.”

“The credit crunch has taken a difficult situation and made it impossible,” adds Jennah Purk, president of Purk and Associates ( in St. Louis, Mo. “I regularly refer my clients to asset-based lenders.”

Alternative Financing Solutions: Asset-bsed lenders provide creative business financing solutions for companies that don’t qualify for traditional bank loans and credit lines, whether this is due to their start-up nature, rapid growth, or financial ratios that don’t measure up to a bank’s requirements. These solutions typically include asset-based loans, accounts receivable financing and factoring.

In 2009, factors provided $140 billion in financing, up slightly from the year before, reports the Commercial Finance Association. And total outstanding asset-based loans increased 1.25 percent in the fourth quarter of 2009.

“Banks today have reverted back to a 1980s and ‘90s model with regard to financial ratios,” says Albert Christiansen, a partner with B2B CFO ( in Phoenix, Ariz. “That’s why asset-based lending is so important right now. There are many companies that can’t meet a bank’s lending criteria, but they need to keep their cash flowing.”

Larry Potashnick, the CEO of Capital Performance in St. Louis, Mo., concurs: “Bank underwriting guidelines are getting tighter and tighter. The good thing about asset-based lenders is that they’re able to plug a pretty big financing gap that exists right now: Businesses that aren’t quite creditworthy enough to borrow from a bank, but they still need critical working capital in this tough environment.”

Manufacturers and distributors with creditworthy customers are often good candidates for asset-based loans and factoring, says Purk, because the financing is based on receivables, not inventory. “Most of my clients who have done this kind of financing have been light manufacturers that were startups, or where the owner didn’t have sufficient personal assets to pledge as collateral.

“Banks don’t want to repossess a warehouse full of steel plates, car parts or frozen eggrolls,” she adds. “But an asset-based lender can convert accounts receivable to cash quickly, and cash is king.”

Christiansen tells of a distributor with a strong business model and a good understanding of its market that needed a cash flow boost to weather the economic downturn. “The company got financing from an asset-based lender that provided the working capital necessary to keep going. They grew from about $7.5 million in revenue in 2008 to $10 million last year, and they should hit $13 million in 2010. This growth would have been impossible without asset-based lending.”

A Working Capital Boost: Asset-based lenders can also help companies that have bank loans or lines of credit but need additional short-term working capital to take advantage of opportunties, like an unexpected large order. “It can be hard to get a credit line increase in this environment,” says Miller. “Too many companies aren’t aware of how asset-based lenders can help them in situations like these. I’ve referred many clients to asset-based lenders and will continue to do so.”

Asset-based lending is often temporary, providing much-needed working capital during a start-up or transition phase until the company has enough financial history or a strong enough balance sheet to become “bankable.” Purk says banks usually want to see three-to-five years of financial statements from potential borrowers.

“Asset-based lenders serve a clear need in the marketplace right now,” says Christiansen. “Some of my clients have improved their cash flow greatly by taking advantage of these types of financing.”

Read other articles and learn more about Tracy Eden.

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