A recent survey of 340 CEOs of companies listed on the New York Stock Exchange and 285 small business owners, conducted by NYSE Euronext, found that more than half the respondents agreed that most private sector job creation in the next three years will come from small entrepreneurial companies.
A vast majority of those same small business leaders, nearly 80%, indicated that one of the biggest impediments they face in creating new jobs is lack of access to capital. This lament is not new. Since the onset of the recession and accompanying credit crisis in 2008, businesses large and small have found it more difficult to obtain financing. One sector of the financial services industry that did not restrict the flow of capital to businesses during the downturn, and continues to lend to businesses today, is the asset-based lending and factoring industries.
What allowed asset-based lenders and factors to continue to provide funding, serving as a crucial lifeline to U.S. businesses of all types and sizes, when traditional sources of commercial financing dried up, was ABL and factoring’s unique focus on the assets of borrowers. Many of the small business owners who expressed concern about their ability to obtain financing in the NYSE Euronext study may not be aware that their assets – accounts receivable, inventory, plant & equipment, even intellectual property – could be their ticket to affordable, flexible and stable credit that they can use for working capital or to grow their businesses and hire employees.
Bank of American Business Capital, one of the leading asset-based lenders in the U.S. describes the distinction between ABL and traditional commercial bank financing :
The primary difference between asset-based lending and commercial bank financing is what the lender looks to first for repayment of a loan. A bank will look first to the cash flow for the repayment, then to collateral. An asset-based lender looks to collateral first. Since banks underwrite cash flow as their primary repayment source, they typically require less collateral controls and monitoring but more financial covenants.
For "asset rich" companies, an asset-based loan may make more funds available because it is not based strictly on the anticipated levels of cash flow. Additionally, the structure often requires fewer covenants, providing more flexibility for many borrowers.
Lenders who provide asset-based credit facilities will work closely with the borrower, monitoring the collateral and working with the client when challenges arise. Clients of asset-based lenders and factors will frequently attest to the flexibility offered by their lenders.
ABL and factoring have evolved over the years. Once saddled with the reputation of being “lenders of last resort” who charged exorbitant rates and fees, ABL and factoring are now mainstream lending options preferred by many companies in need of critical growth and working capital. In recent years, companies such as Tyson Chicken, Hertz, Sears, Supervalu, US Food, United Rentals and many other businesses have opted to take advantage of the benefits of an asset-based credit facility to meet their strategic financing needs.
Businesses of all types and sizes that have assets and are in need of financing should seriously consider exploring asset-based lending and factoring. The Commercial Finance Association’s (CFA) new interactive website, The Business Capital Network, is now available to easily help businesses connect with asset-based lenders and factors. It is free, fast and easy.