Strategic Access to Capital in any Economic Environment
Senior Vice President
Chase Business Credit
Mary Reasoner is Senior Vice President and Southeast Region Head for Chase Business Credit. She is responsible for asset-based lending originations and portfolio in a 6-state geographic territory which includes the Southeastern states.
Whether looking to expand, buying a competitor, or feeling the pinch of a seasonal or cyclical business, any number of situations can leave a company in need of cash. One way to raise capital is to borrow against assets, such as accounts receivable, inventory, machinery, equipment and real estate. More and more companies are using this strategy. In fact, the Credit Finance Association's quarterly survey of the largest asset-based lenders indicated that new credit commitments originated in the fourth quarter of 2011 were 8.4 percent higher than in the third quarter of 2011 and 18.4 percent higher than in the fourth quarter of 2010.
A major difference between traditional lending and asset-based lending is the reason behind granting the loan. Whereas traditional lenders evaluate cash flow before collateral (assets) to determine eligibility, asset-based lenders focus on collateral and then on cash flow.
Key elements of asset-based lending
In essence, asset-based loans monetize a company's eligible assets to accelerate cash flow. The most common type of financing is a revolving loan (revolver); however, there are other types of structures available. While the structures are different, pricing for asset-based loan is generally comparable to traditional loans.
The bottom line is that asset-based loans offer companies a flexible way to ensure liquidity. Terms can be structured to meet the unique needs of each individual situation. Some possible scenarios when asset-based loans can be a strategic advantage include when companies are:
- Experiencing rapid growth, resulting in order flow outpacing cash flow
- Participating in a buyout or a merger
- Undergoing a transformation due to restructuring, turnaround or bankruptcy
- Operating an enterprise that is cyclical or seasonal
Asset-based lending may be appropriate for almost any company with a balance sheet that is heavy with working capital, typically in manufacturing, distribution, retail and business services.
A sampling of asset-based lending situations
Asset-based lending can help companies weather a temporary cash flow issue or make strategic moves to improve their market positions. Here are a few examples.
Funding new business opportunities
A manufacturing supply company that was hit hard by the recession—leading to three consecutive years of cash burn—won new business, which it needed to fund in order to ensure the success of its turnaround. After conducting significant due diligence on company management and its detailed, well-conceived business plan, Chase structured financing contingent upon meeting certain performance targets.
Financing expansion plans
A manufacturer, supplier and designer of electrical products needed a financing plan to address expansion plans—domestic and international—while adding flexibility within the covenant structure. The company and the local Chase team collaborated to develop a solutions-oriented approach to risk management and to address fluctuating costs.
Furthering a turnaround
A building products company's overseas activities created liquidity issues because the company was in the midst of a turnaround and had already made dramatic cuts in their operations. It also needed export/import help along with a term loan to support its capital expansion. Chase's quick local decision-making, EXIM capabilities and the creation of a collateral pool through advances against standing lumber furthered the company's turnaround effort.
Eliminating an owner's guarantee
A manufacturing company had grown concerned about the stability of its prior lender in the aftermath of turbulent financial markets. At the same time, It also wanted to remove an owner's guarantee from its loan package. By working with a local Chase banker who knew the firm well, the company was able to arrange a financing structure that used the company's fixed assets to replace the owner's guarantee. While this type of structure required extra time and effort, Chase was able to create a better match between the company's longer-term borrowing usage and the financing. This enabled the company to build equity and liquidity over the long term through scheduled debt reduction.
Your situation may be different from these examples, but the flexibility and innovation behind Chase's solutions will be the same. We will work with you to develop a plan that meets your specific needs.
What lenders expect
If current conditions point toward the need to raise capital, an asset-based loan may be a viable solution. If so, you need to know what financial institutions consider when evaluating potential borrowers.
- Consistent demonstration of strong management
- Well-defined business objectives
- Working capital assets
- Companies that are in acquisition mode, expanding or subject to seasonality or cyclicality
The ability to meet these criteria improves a company's position to secure an asset-based loan.
How Chase can help
Many financial institutions offer asset-based lending solutions. With Chase, you get a seasoned management team plus personal access to experienced local bankers who know the market and can draw upon the resources of a global financial institution.
Our bankers are dedicated to developing strong relationships with the companies they serve and take the time to understand the specifics of a company's business. We approach each situation openly and develop unique solutions for each company's needs.
Chase offers a network of offices in the U.S., Canada and the United Kingdom that provide a broad global footprint with a strong local presence. Recently, Chase has expanded its asset-based lending capabilities in the west and southeast regions of the U.S.
For more information about our asset-based lending solutions, contact your local Commercial Banking representative.