Asset Based Lending

The current recession has created a bleak lending environment for businesses and new data suggests it is getting worse. Today Federal Reserve Chairmen Ben Bernanke said that “many “creditworthy” firms with “strong” cash flows are having trouble getting loans.” This statement was based on data showing that S.B.A. lending has seen a two-thirds drop in the month of June compared to May, to bring it to the lowest levels in decades. Bankers say this steep drop is due to the expiration of a bill that provided higher percentage guarantees of loans made through the S.B.A. program.

With the S.B.A. taking a big hit, business’s have increasingly turned to asset based lending as it is usually the only option left open to them. Asset based lenders will lend when banks wont for two main reasons. First, the amount of funding is determined and secured by the value of an asset. The second reason is that asset based lenders are forced to take a more hands-on approach by monitoring transactions rather than simply collecting periodic payments. These extra steps to manage risk enable asset based lenders to make loans where banks will not, but it also leads more expensive funding.

Despite the high cost, the demand for financing is high and asset based lending provides much needed supply. However the venture into asset based lending might require a bit of homework for the business owner as there are many forms to choose from.  Purchase order financiers, inventory lenders, accounts receivable factors, equipment financing companies, real estate lenders, etc. are all asset based lenders and each unique type of financing has a different set of benefits, draw-backs and affects on the bottom-line.

However, it appears that asset based lending will continue to increase it’s role in the lending environment. The new initiative that would make S.B.A. loans more appealing to bankers is in the early stages of working its way through the Senate and House. Even if it passes, it might take a considerable amount of time before it is enacted into law. This means that S.B.A. lending levels are likely to stay historically low and business owners will have little other choice but to turn to asset based lenders to get access to the capital their businesses need.