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," said 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," claimed Jennah Purk, president of Purk and Associates in St. Louis. "I regularly refer my clients to asset-based lenders."


Alternative Financing Solutions

Asset-based 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, factoring companies provided $140 billion in financing, up slightly from the year before, reported 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," said Albert Christiansen, a partner with B2B CFO in Phoenix. "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, 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 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, Purk said, 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 added. "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 also can help companies that have bank loans or lines of credit but need additional short-term working capital to take advantage of opportunities, like an unexpected large order.


"It can be hard to get a credit-line increase in this environment," Miller said. "
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 said 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," Christiansen said. "Some of my clients have improved their cash flow greatly by taking advantage of these types of financing."


Tracy Eden is the national marketing director for Commercial Finance Group (CFG), which provides financing solutions to small and medium-sized businesses. Contact him at www.CFGroup.net or via e-mail at tdeden@cfgroup.net.