Technically, the Great Recession is now well behind us in the rear view mirror, but you might not know this based on the continued slow growth of the nation’s economy. GDP growth during the tepid economic recovery has been far slower than past recoveries — it edged up just 0.1 percent during the fourth quarter of 2012 — and the national unemployment rate remains stubbornly high as well.
During times like this, it’s important to remember the old adage that “All business is local.” Just because the national economic picture isn’t rosy doesn’t mean that this is the case everywhere — far from it. Some areas of the country are booming economically, as are many industry segments like healthcare and technology.
The Survey Says…
A recent survey conducted by Bank of America points out how true this adage is. In the survey, to which 1,003 U.S. small business owners responded, 63 percent said that the majority of their customers are located within their local community. Just 27 percent, meanwhile, said the majority if their customers are located outside their local community, and just three percent said most of their customers are located outside the U.S.
Not surprisingly, 75 percent of the respondents said that the local economy plays a more significant role in their business success than the national or global economy. And while just 38 percent said they expect their local economy to improve over the next year, more than half (54 percent) expect their revenue to increase in 2013.
The list of small business owners’ top concerns also isn’t too surprising. Atop the list is “the effectiveness of U.S. government leaders,” followed by commodity prices, healthcare costs, consumer spending and the strength of the U.S. dollar. One thing that’s interesting is what’s not on the list of concerns: access to capital. Seven out of ten owners, in fact, believe they have enough access to capital to effectively run their business.
This points to the important role played by local lenders when it comes to helping small businesses grow. Unfortunately, the growing volume of banking regulations coming out of Washington is making it harder for many banks — especially community banks — to make loans to their small business customers.
Dodd-Frank and Basel III
The Dodd-Frank Wall Street Reform Act has placed higher capital requirements on banks and imposed a greater regulatory burden through new bank disclosure and reporting requirements. In addition, Basel III requires banks to meet minimum capital and equity requirements, which some experts fear may limit banks’ ability to make loans to qualified small business borrowers.
Fortunately, options do exist for small businesses that are financially challenged. Asset-based lenders are an excellent temporary source of financing for businesses that are pre-bankable, non-bankable, working through a turnaround, or simply growing so fast that traditional financing does not work. These solutions typically include asset-based term loans, accounts receivable (A/R) financing, factoring and purchase order financing.
With bank underwriting guidelines getting tighter, asset-based lenders in many cases are the perfect solution to help plug financing gaps that many companies are experiencing right now. Manufacturers and distributors and B2B service companies are excellent candidates for ABL because financing can be based on their accounts receivable.
According to the most recent Asset-Based Lending Index, which is published quarterly by the Commercial Finance Association, total committed asset-based credit lines were up by 2 percent in the fourth quarter of 2012 compared to the previous quarter, and total credit commitments were 6.7 percent higher than a year earlier. “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,” states the Commercial Finance Association’s Chief Operating Officer Brian Cove.
Finding the Right Asset-Based Lender
Your bank is a good place to start your search for an asset-based lender. ABL is a specialized type of financing that is not offered by all banks. If your bank does not offer ABL, it may be able to refer you to a commercial finance company. You should carefully investigate any finance company that you are considering working with. Meet personally with a local representative and determine the following:
- Are they a direct lender?
- How long have they been in business?
- How well capitalized they are?
Make sure you are comfortable with the representative and the asset-based lender, as they will likely become an integral part of your team.
Tom Klausen is the president of First Vancouver Financial Services, Ltd., and a consultant in the small business field. He works with small business owners, lenders, consultants and accountants throughout the U.S. and Canada. He has been involved in the alternative lending field for more 27 years and has written and published numerous articles on the topic of alternative finance. For more informatin, call (604) 988-1490 (in Canada) or (206) 947-0912 (in the U.S.) or visit http://www.fvf.ca.