It’s time to take a fresh look at asset-based lending
Stats Tell the Story
Statistics reveal that in the current credit environment, traditional bank lending overall is trending downward, while asset-based lending is trending up. According to the FDIC, the overall volume of small business loans has been shrinking since 2008 and was recently down 15 percent from its peak. The total number of outstanding small business loans (about 1.5 million) is the smallest since 1999, according to the FDIC.
On the flip side, the most recent Asset-Based Lending Index, which is published quarterly by the Commercial Finance Association, reveals that total committed asset-based credit lines were up by 1.8 percent in the first quarter of 2012 compared to the previous quarter, and total credit commitments were 7.3 percent higher than a year earlier. In addition, more than half of asset-based lenders (55 percent) reported an increase in new credit commitments.
Meanwhile, utilization of asset-based lenders’ credit lines increased to 40.8 percent in the first-quarter of 2012, which compares to 39.4 percent in the previous quarter and 39.1 percent during the same quarter in 2011.
“As we have maintained throughout the recession and credit crisis, asset-based lenders will continue to lead the way as a primary source of working and growth capital for U.S. businesses as the economy hopefully moves in a positive direction,” notes Brian Cove, the CFA’s Chief Operating Officer.
Both factoring and A/R financing are usually considered to be transitional sources of financing that can carry a business through a time when it does not qualify for traditional bank financing. After a period typically ranging from 12-24 months, companies are often able to repair their financial statements and become bankable once again.
In some industries, though, companies rely on ABL as a permanent source of financing. Trucking, apparel manufacturing, import/export distribution and many service industries rely heavily on factoring as their primary financing vehicle.
Gus Mercado, the founder of DataLogix Texas — a $10 million provider of manpower solutions to the telecommunications industry — says that asset-based lending helped get his company off the ground initially.
“When I approached my bank with a request to extend our small credit line, they said they couldn’t lend us more money based on our contracts or receivables, but only on tangible collateral like fixed assets, real estate or equipment. As a service-oriented project management company, we didn’t have this kind of collateral. We had a solid plan to grow the company, but we were facing big cash flow challenges, especially when it came to paying our growing number of employees and funding the fast growth of our projects.”