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Asset-Based Loans As An Alternative

No longer a last resort, asset-based loans are a viable option for capital purchases of financing equipment sales.

The textiles, apparel and fibers company seeking equipment financing whether for its own use or when selling to customers should consider any financing options offered by the manufacturer or distributor as a matter of course. It might also be prudent to consider shorter-term leasing rather than the outright purchase of that badly needed equipment.There is also the Small Business Administration (SBA) and its many loan programs that can be used to finance equipment acquisitions. The most popular is the basic SBA 7(A) program, whereby the SBA guarantees loans to small businesses.Although the SBA has often been called the "lender of last resort," there are many textile businesses that will never have the kind of balance sheet that appeals to traditional financial markets. Fortunately, there is a type of financing that caters specifically to financing situations many bankers would deem too risky to warrant serious consideration.The so-called "asset-based loan" (ABL) business is growing by leaps and bounds. ABL is not a new phenomenon, however.Once known as commercial, or "bootstrap," financing, the concept is simple: A company is lent money based on its existing net worth as measured by the real estate it owns and its equipment, inventory and/or receivables.The financial institution making the ABL, be it a bank, investment house or some other financial organization, takes a lien against the assets until the loan is paid. The secured assets are then closely monitored, often being tracked on a daily or weekly basis. Because of the close monitoring, the lender often plays the role of financial advisor, thus becoming a relatively active partner in the deal.According to statistics compiled by the Commercial Finance Association, a nationwide organization of lenders that specialize in factoring and asset-based lending, the outstanding dollar amount of asset-based loans has been on the rise since the mid-1970s, with all but two of the past 15 years showing an increase.More and more textile companies are turning to the asset-based option to satisfy their credit needs. According to the experts, this is true for two reasons: first, banks have been slow in making decisions because they are being very conservative today. Thus, a lot of textile executives are turning more to asset-based lenders, who tend to make much quicker decisions and who are usually more understanding of the textile operations business. Second, many major banks wont finance smaller transactions because they just dont fit the banks parameters of size.Many experts agree that ABL permits textile businesses to use their assets to produce working capital. Typically, these same companies are not bankable in a conventional sense. Their credit profile may not be strong enough, or they may not even be aware of what type of financing they will qualify or not qualify for.Asset-based lenders tend to see themselves as more flexible and more responsive to their clients than most standard loan officers. In some ways, those ABL lenders actually provide a more reliable form of financing. Shopping For An Asset-Based LoanAsset-based loans are no longer considered a last-resort type of financing. In fact, textile executives have increasingly found that going with an asset-based lender means adding a group of financial experts to their strategic planning team.What should an executive look for when shopping for ABL fundingA good business plan is essential. Far too many business owners and managers fail to think through their cash flow projections. Those deals, where the owner or manager really understands his or her business and the business costs, have a far easier time of it with ABL lenders.The owner or manager must put something on the table. As much as lenders might want to help a company, they are a regulated industry and cant take chances with their depositors money. The executive thus wants to make sure to get a decent investor in the company who is willing to put up some equity capital. Those undercapitalized textile operations or those with a negative net worth have troubles even with asset-based lenders.Go with a lender that specializes in your industry. By specializing in a certain sector, a lender can bring a lot of added value to any financing package. In addition to often being willing to lend funds to a business that might ordinarily be turned down by a lender less familiar with its field, an asset-based lender specializing in a particular field can contribute a great deal of useful knowledge and advice.Consider a lender who can offer a variety of services. Many asset-based borrowers feel as if they dont have a lot of options. They get a loan arrangement with a lender that is not a bank and then go to a banking institution for their other needed services. Usually, that leads to higher costs for their total banking services.Choose a lender that is willing to play a partnership role. A harmonious relationship in which a lender feels that he or she is a part of a partnership, as opposed to being an overseer, is critical to the success of the borrowers programs.Remember that this is part of a long-term program. A textile executive should find a lender that will be able to satisfy the operations needs not only today, but also far out into the future.Ignore "sticker shock." Asset-based loans are more expensive than standard, unsecured financing, and a lot of executives do experience sticker shock when they discover those costs. A realistic yardstick is the determination of whether borrowing at the rate offered will have a positive effect on the textile operations bottom line.Asset-based loans are an excellent method for financing badly needed equipment or for financing the sale of equipment to customers and other end-users.Remember, ABL is just one type of financing. It may, at least for the time being, be the only financing avenue available to the textiles, apparel and fibers operation, but it is still only one method. Editor's Note: Mark E. Battersby is a tax and financial advisor from Ardmore, Pa. He writes a weekly farm taxes column syndicated in 45 newspapers and a topical tax column carried by several trade magazines and more than 25 business publications.

September 2000