- What is the difference between asset-based lending, revolving credit facilities and commercial finance?
- What is more important in selecting a lender: the people or the institution?
- How do I close a new facility with the lowest possible cost and in the least possible time?
- What makes asset-based lending different from factors?
- What are some of the benefits of financing accounts receivable?
- What confirmation procedures are customary in an asset-based loan?
What is the difference between asset-based lending, revolving credit facilities and commercial finance?
Asset-based lending refers to loans secured by a wide variety of assets. Businesses can borrow money using the liquid, current assets of the company (such as accounts receivable and/or inventory) or the fixed assets of a business (such as plant, property and equipment) as collateral. As an asset-based lender, we rely on the value of the underlying collateral to minimize the loan’s credit risk. Asset-based loans also can include equipment loans and real estate mortgages. Commercial finance is the term most commonly affiliated with the industry group of lenders that provides all types of asset-based loans to business and commercial borrowers. Asset-based lenders are sometimes referred to as secured lenders.
An argument could be made that the people are the institution when it comes to lending money. A good working relationship with your lender is important because you will be interacting regularly, in all likelihood every day. Make sure you are comfortable with the people and the organization. Are the people you propose to work with innovative and knowledgeable? Are they part of an organization that is committed to asset-based lending? If your lender does not have a specific product to suit your needs, will it be able to create one for you? As your business grows and changes, will your lender have the resources to address your evolving capital needs? Is your lender financially stable? (Its stability is directly related to its ability to raise money and, therefore, to your ability to borrow money.)
The cost of closing can be driven up by a number of factors, many of which you can control. For example: extensive negotiation over terms common to asset-based loan contracts; pushing the structural limits of a given type of loan; selecting a lender that makes incrementally more stringent demands; and using a law firm unfamiliar with asset-based financing.
The following suggestions can help speed the process and minimize cost:
- Be open. The final decision to lend, and the terms on which a loan is made, will be based in large measure on a thorough analysis of your company. You expedite the process and our decision making by providing complete information regarding your company as soon as appropriate.
- Be knowledgeable. Every lending relationship is a two-way street; you want to borrow money and we want to lend it to you. Both sides have key responsibilities throughout the lending process. Know your responsibilities and your needs. Know what is practical and possible for your business as well as for the lender.
- Commit. Understand that the closing process is the foundation of your new lending relationship. Be willing and prepared to commit sufficient time and energy to get the process started and completed in a timely manner.
Asset-based lending calculates interest rates on the loan balance rather than the collateral balance. Generally, financing costs are significantly lower than factoring. The most important difference between asset-based lending and factors is that asset-based lending normally does not require notification of assignment to a borrower's accounts. Additionally, asset-based lenders focus on the borrowers, helping them be successful whereas factors focus primarily on the accounts receivable debtor.
Accounts receivable financing can enable a company to increase inventory, finance growing sales, meet payroll and operating expenses, purchase new equipment and take advantage of trade discounts. Furthermore, accounts receivable financing provides growth and capital as borrowers can borrow immediately on sales.
CapitalSource's Asset Based Lending group customarily confirms financial and collateral information provided by the company in order to support ongoing loan requests. There are two basic types of confirmation:
- Field Examination. Typically our field examiner will visit your facility to get a better understanding of your business operations. Field examination benefits you because it enables us to provide the maximum amount of liquidity possible which can be supported by the collateral. A field examination is not like the audit a CPA firm would conduct at a business. Instead, it confirms collateral and financial information and helps us evaluate trends in your business.
- Accounts Receivable Verifications. Verifying accounts receivable simply involves confirming some or all of the borrower’s receivables directly with the borrower’s customers. This procedure is handled not as a lender but confidentially as an audit services.