Investment Bankers to the Middle Market

The Corporate Shift to Asset-Based Loans

If your bank is not providing you with the capital you need to run your business, then realistic business owners consider asset based financing provided by Factoring firms, which Corporate Finance Associates can arrange to purchase your accounts receivable (A/R). The following three part Article discusses the trend from cash flow lending to asset based lending, contrasts factoring with a loan secured by A/R, and describes how a win-win solution can be achieved to increase your operating cash even if you have pledged A/R to your bank.

PART I • Realistic Business Owners Look Beyond Bank Cash Flow Loans

The Good News:  Financing is currently available for your middle market business despite the lingering Credit Crunch. While traditional banks have tightened credit standards on cash flow based business loans, commercial finance lenders are actively lending to fill the operating capital needs of businesses by making asset-based business loans. 

An asset-based business loan (ABL) is secured by a first priority security interest against a company's accounts receivable, inventory or equipment. On the other hand, traditional commercial banks underwrite primarily based upon the cash flow performance of the business as the source for repayment, and secondarily look to collateral by filing UCC-1 Financing Statements against assets. 

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PART II • Factoring and Financing Accounts Receivable, A Comparative Analysis

As discussed in Part I of this three-part Article, the shortcomings of traditional bank cash flow lenders in this continuing Credit Crunch, have more middle market companies searching to maximize the financing potential of their accounts receivable (A/R). Therefore, to assist companies in looking beyond only a loan secured by A/R, to factoring, which involves selling company A/R at a discount, the following chart and accompanying notes are presented.  

Part III of this Article explains how bank cooperation, in the form of partial Subordination Agreements of their UCC-1 Financing Statements against company A/R, while retaining other collateral, can be a win-win scenario. The released A/R is either factored or used as collateral for another loan, and the proceeds are utilized to pay down the original bank loan, as well as to improve the company's cash flow.

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PART III •  Partial Subordination of a UCC-1 Can Be a Win-Win for Banks and Their Customers

Heading into 2010, the continuing Credit Crunch presents an opportunity for both Banks and their middle market business Borrowers, to utilize accounts receivable (A/R) collateral more productively. However, before progress can be made towards increasing Company working capital, how Banks, as cash flow lenders, view A/R collateral, should be addressed in a cost-benefit manner.  

As pointed out in Part I of this Article,  Banks underwrite senior loans based on earnings before interest, taxes, depreciation and amortization (EBITDA), and insert financial covenants in loan documents which require that the Borrower have sufficient monthly income to cover fixed monthly expenses. Nevertheless, Banks typically require a blanket Uniform Commercial Code lien (UCC-1) against all tangible and intangible assets, including A/R.

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