When to Use an Asset-Based Lender

Jim Bitterle - Consulting Managing Partner ·

Virtually every mature company has gone through rough financial times. If you’re around long enough, your company will go through rough times again. When this happens, you may get moved to your bank’s “Special Assets Group.” Many banks have different names for this group, but in generic terms, they are all “workout” groups. The purpose of a workout group is to reduce the bank’s risk. Typically, this is accomplished by getting rid of accounts that have become too risky. In some cases, the workout group will work with the company to remediate it, then return the company to the original lender. Unfortunately, this scenario occurs infrequently. Most workout scenarios require the company to find an alternative lender, then pay off the current bank.

These scenarios are not common occurrences for most companies. Consequently, they don’t know how to proceed effectively. In most cases, the companies waste significant amounts of time, money and energy trying to find a new bank. As it happens, other bankers always seem interested in the company. However, as the other bankers begin to assess the financial condition that led to a workout, they tend to back away from the opportunity. They’ll often say, ”we really like your company, we’d love to lend to you, but we’d like to see six months of stable profitability and cash flows before we can lend to you.” This cycle repeats itself and causes significant consternation for the company’s leadership team. In the meantime, the current bank’s workout group increases fees, interest rates and reporting requirements. The situation can become very contentious and costly.

We recommend engaging Asset-Based Lenders (ABLs) as soon as possible. ABLs are experts at lending into difficult situations. As their name implies, they lend based on assets. Typical lending is based on formulas that usually include:

  • 80%-85% of Accounts Receivable balance (less old receivables)
  • 50% of inventory

Some ABLs also lend on equipment and real estate. We recommend getting the ABL in place quickly. However, be sure to negotiate the shortest term possible with the best rates and fees possible. ABLs are legitimate banks, however their rates and fees are higher. They serve the purpose of acting as bridge financing until your company is “bankable” again.

Lastly, be sure to create and implement an aggressive turnaround plan to ensure your company is bankable as soon as possible. Without the turnaround plan, the probability of survival is greatly diminished.

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