Whether you’re a growing start-up or a thriving business, cash flow challenges can constrain your operations and cause sleepless nights in the process even when sales and accounts receivable are booming. And often times, traditional lenders may not be inclined to see your existing accounts receivable for what they really are assets possessing cash value. Asset-based facilities consist of revolving lines of credit and term loans backed by and secured by accounts receivables, inventory, machinery and equipment, real estate, marketable securities and other assets. http://www.1stcapitalsolutions.com/1_assetapp.htm http://blogs.law.harvard.edu/tech/rss Wed, 6 Feb 2008 18:38:18 -0500 info@1stcapitalsolutions.com Wed, 6 Feb 2008 18:37:47 -0500 1440 info@1stcapitalsolutions.com FeedForAll v2.0 (2.0.2.9) unlicensed version http://www.feedforall.com http://www.1stcapitalsolutions.com/cashflow2.jpg http://www.1stcapitalsolutions.com/1_assetapp.htm 144 35 Asset-based loans are lines of credit that typically are secured by working-capital assets, including accounts receivable and inventory. Some also are backed by machinery and equipment. Just a few years ago, asset-based financing was considered rescue financing and the lender of last resort. Asset-based loans were seen as a financing vehicle used only by companies whose financial performance couldn't support a cash-flow loan. Some finance executives prefer asset-based loans because they lack the financial performance covenants imposed by cash-flow loans. Asset-based financing also provides flexibility for businesses in a growth spurt, because the loan amount can increase along with the borrower's inventory and receivables. An asset-backed loan can track the business growth. Asset-based lending is not only by companies in financial trouble. Consider, It makes sense to borrow based on a specific need. Inventory and receivables balances peak toward the end of summer as retailers begin stocking their shelves for the holiday season. Because the loan amount available is tied to the level of these assets, the company can adjust its borrowings as its inventory and receivables increase and decrease. This facility is competitive in terms of the interest rate and terms. According to the Commercial Finance Association, the total outstanding monthly average of asset-based loans jumped from $117 billion to $362 billion between 1994 and 2004. Asset-based loans can work very well for companies in cyclical industries, because the loan amount can fluctuate with the company's accounts receivable and inventory base. They also work well for businesses that are newer or in a turn-around phase and don't have a strong track record of financial performance on which to base a cash-flow loan. Asset Lenders Asset-based lenders typically follow the balance sheet in determining which assets will secure an asset-based loan. Before issuing a loan, a lender must carefully evaluate the assets that will secure it, determining first which receivables are likely to remain uncollected and then culling those from the valuation. For example, the lender may exclude from the borrowing base any receivables that have been outstanding for more than 90 days. For loans secured by inventory items sold to consumers, the valuation process tends to be fairly straightforward. Because most goods are bought and sold daily, it's relatively easy to determine their value. Valuing inventory items sold to other businesses becomes more complicated, because the market for the items may be small. What's more, demand for the items may drop if buyers know that the manufacturer may go out of business and won't be around to support the products. On asset-based loans secured by machinery and equipment, the appraisal team physically inspects the equipment, reviewing its condition, age and manufacturer, among other factors. The team also talks to equipment dealers and scours databases showing recent sales of the same or similar equipment. Under a forced liquidation, the company has less than six months to convert its assets to cash; with an orderly liquidation, the company has up to a year. A forced liquidation can prompt a drop in the value of the goods that the appraisers need to consider. In the past, asset-based lenders typically didn't lend against work-in-process (WIP), or inventory that wasn't yet in final form, because it was difficult to calculate the cost of transforming WIP to salable inventory. Advances against intellectual property also tend to be fairly low, with most around 25 percent to 30 percent of the estimated value of the assets. Asset-based loans today can compete on interest rates with cash-flow loans. Closing gap between interest rates for asset-based loans and those for cash-flow deals is a result of increasing competition in the loan market. http://www.1stcapitalsolutions.com/1_assetapp.htm 7A90586A-114E-404F-96BC-ACABCD8847FB Wed, 6 Feb 2008 18:32:32 -0500