Asset-based lending implies a secured lending arrangement whereby the assets securing the loan are the primary source of repayment as opposed to cash flow or earnings from the business. In conventional bank underwriting, earnings from operations are assessed to determine debt service capacity and a lender may or may not take collateral to secure the loan as a secondary source of repayment. In an asset-based structure, the loan is self-liquidating and the conversion of the underlying assets to cash comprises the lender’s primary underwriting focus. The most common example of this occurs from the collection of accounts receivable and sale of inventory whereby the proceeds are used to relieve or repay the loan.
At Celtic Bank we describe an asset based loan as: revolving working capital financing for businesses involved in the extension of credit and management of inventory. These types of loans can be used as working capital, to refinance revolving debt, and for purchase order financing (depending on location and loan amount).
Asset based lending usually becomes the most viable option for getting financing for companies that have exhausted all their other fund raising options, or for businesses in dire need of immediate capital. In most cases, these loans have lower interest rates because if the loan is to default the lender will seize and in most cases liquidate the assets tied to the loan.
What are the Advance Rates?
The advance rates for an asset based loan from Celtic Bank are up to 85 percent on Accounts Receivable and up to 50 percent on inventory, with some limitations based on acceptable A/R to inventory ratios.
When it comes to these types of loans we are fairly aggressive on inventory relative to the market, depending on the company and their reasoning behind the need for an inventory advance.
Usually we offer a one to two-year renewable contract term, but we area also open to longer-term deals depending on the business and their needs.
What are the Costs?
The interest rates are a floating rate over Prime with total rate determined based on loan size and credit profile of the borrower. The smaller the deal the higher the rate because it puts more risk on the lender. Larger deals will generally have smaller rates, as will lower risk deals.
There is a closing cost of between 1 and 2 percent, depending on the loan program – these are one-time fees and are not annually recurring.
All other costs associated with an asset-based loan will be included in the rate of interest. There is a monthly minimum fee (not additional) which requires about 30 percent utilization of the line – this means that if there is a one million dollar deal made, each month their monthly minimum fee would be based on the interest the lender earns on a $300,000 average loan balance.
What Assets Qualify as Collateral?
Celtic Bank only requires A/R and Inventory.
What Inventory is Eligible?
Any raw materials (goods used in production) as well as finished goods waiting to be shipped qualify as eligible inventory. No work-in-process will be considered eligible as an inventory asset.
What is the Maximum Loan Amount?
Generally we make loans up to 5 million dollars. We may be able to increase your loan line to six or seven million in California for the right transaction
What are the Closing Procedures?
In general closing a loan like this can take anywhere from three to four weeks. After pre-screening, underwriting is done. If the deal looks good, we will provide a term sheet. If the term sheet is accepted, we take a deposit for expenses or an audit deposit. Then we collect all personal information on the guarantors and we ask for you to submit an application package. From there it usually takes about two to three weeks for our underwriter to send the loan package to loan committee. After a loan has been approved by the committee it typically takes two to three weeks to close.
What sets us apart from other banks is our underwriting approach. We are far more liberal on underwriting/credit quality and on deal structuring than conventional banks. This is because we use government guarantee programs to reduce our credit risk, meaning we have the ability to help more small businesses across the country. What makes us different from factors and commercial finance companies and non-bank asset-based lenders is our rates; they are typically 33 to 50 percent the cost of typical factors. Another aspect of our approach that sets us apart from other lenders is our aggressive inventory approach.
Let us know if you have any questions about asset based lending, and if you are interested in learning more about our flexible and affordable working capital solutions call Daniel Godfrey at (888)241-7157