Asset-based lending: The post-crisis landscape
Look familiar? Of course it does. As Barrickman notes, “This is the classic case where an asset-based lender can come in and help both the borrower and the bank. Therefore, asset-based lenders should make a concerted effort to partner with banks. The bank can maintain the primary relationship with the customer and still meet the customer’s credit needs responsibly by engaging the asset-based lender as a partner—either to issue the credit or help monitor the collateral.”
Getting Back to Lending Basics
Covington notes that many banks lost sight of how lines of credit are supposed to work and, as a result, ended up backing themselves into an asset-based lending corner. “If $900,000 is outstanding on a $1 million line of credit, you’ve essentially got an asset-based loan, with long-term repayment based on short-term assets, which is very risky. As banks realize this, some are starting to get back to the proper use of lines of credit for temporary working capital, with companies in and out of the line on a normal monthly cycle.
“If we saw that a business was going to be heavy into its line right from the start, or we expected this to happen soon, we might call in an asset-based lender to either take the whole lending relationship or help out with underwriting and monitoring,” Covington adds. “In this case, the credit position would still be ours.”
Unlike asset-based lenders, Covington says banks tend to focus less on how quickly receivables and inventory turn or whether inventory is in boxes or work in process. “At the end of the day, our underwriting is based more on company performance: Is there a strong balance sheet? Are there consistent trends in earnings and equity?
“If receivables and inventory monitoring requires more than a casual glance, that’s when I believe banks should bring in an asset-based lender that specializes in this,” he says. “Either let them take the credit, or have them confirm that the receivables and inventory are as strong as you think they are.”
Wooding believes commercial banks are well equipped to do what he calls “asset-based lite: a company that’s strong with good assets, for which you just need to put together a line of credit with a borrowing base certificate monitored monthly.” A loan like this can typically be monitored through monthly financial statements, receivable and payable aging schedules and an inventory report, Wooding notes.