A Fresh Look At Asset-Based Lending

Long considered credit of last resort, asset-based lending is gaining ground with companies seeking liquidity in the tight credit market.

Mention asset-based lending, and many CFOs will immediately tell you it's a financing outlet of last resort. That's certainly sometimes the case. But it's a one-dimensional perception -- one that's changing as more and more CFOs simultaneously confront a tight credit market and lower-than-expected results. CFOs are increasingly viewing asset-based financing as simply another tool in the corporate finance tool kit.

After all, even companies with strong bank relationships can fall out of favor with lenders and lose access to their unsecured financing, especially if they experience losses for a couple of quarters. Bad short-term results don't necessarily mean that a business is in bad shape, but because of bank underwriting constraints, one tough quarter can trip covenants on existing loans and prevent companies from qualifying for new financing. Organizations facing such a scenario can use asset-based arrangements as bridge loans to pay off their banks and provide liquidity until bank financing becomes viable again.

"As the economy begins to improve and companies work to improve battered earnings, the primary concern for many financial executives and their advisers is operational liquidity and flexibility," says Ira Kreft, executive vice president with Fleet Capital Corp. in Chicago. "With banks busy reevaluating their relationships, pushing underperforming loans out the door in the process, sources of capital are becoming less of a commodity and something more akin to strategic planning."

The bottom line is that asset-based lending has become an important way for businesses to obtain necessary liquidity when other sources are unwilling to provide it or to do so in a way that meets companies' needs.