Asset-Based Financing Gains Ground

CFOs in search of working capital are borrowing on assets -- and discovering that doing so can offer more flexibility than bank financing.

The prolonged economic downturn has had a chilling effect on many companies' lending relationships. Banks that have been burned by corporate customers are tightening lending requirements, leaving many organizations out in the cold. "CFOs are struggling to find working capital," says Mark Jacobs, vice president of corporate lending for Stamford, Conn.-based GE Corporate Lending. "The problem is that cash flow is working against the company."

Banks that traditionally lent against cash flow are increasingly unwilling to advance funds as revenue streams dwindle. Ironically, that's often when a company's financing needs are greatest. But businesses with strong accounts receivable, inventory, real estate or securities have an alternative: asset-based financing.

When Detroit-based LDMI Telecommunications' bank line of credit was set to expire last year, executives worried about their financing options. "We are a telecommunications company at a time when telecom is sort of an evil word in the capital markets," says CFO Michael Mahoney. The company investigated asset-based loans. "We were looking for flexibility," Mahoney explains, "and our accounts receivable is strong, with little customer concentration." The company's A/R is distributed among many customers, so any individual default has little impact on the overall quality of those receivables. LDMI decided that asset-based financing was a good choice.

Increasing numbers of companies are making that decision. In the late '90s, "a lot of companies developed capital structures that no longer work because of the economic downturn," says Jim Connolly, president and CEO of Fleet Capital Corp. in Glastonbury, Conn. "That's why a lot of businesses are replacing financing to create a debt structure that works better for the company today."