How Asset-Based Funding Works: Eric Inspektor Answers Common Questions
For many companies that don’t have proven credit histories or for one reason or another don’t qualify for traditional loans when it’s time to expand, the option that’s become increasingly attractive to them is an alternative one — asset-based lending.
Eric Inspektor is co-founder and senior underwriter at CORFinancial Corp., a boutique investment bank that focuses on providing company owners with advice and funding solutions on asset-based financing when it’s time to grow their businesses.
We sat down with Eric and asked him about how this approach works, what types of companies take advantage of this innovative solution and how the COVID-19 pandemic has affected the lending industry and business growth more generally.
When many people think of business loans, their thoughts turn first to banks and traditional financing institutions. How is asset-based lending different from what they offer, and why in your opinion may it be better in various circumstances?
Eric Inspektor: Traditional or tier one banks are balance sheet and cash flow lenders and asset-based lenders lend against the company’s assets. In other words, banks look at historical performance while asset-based lenders rely on the present asset value and future performance based on deployment of their capital.
Most businesses applying for loans need the funds to address future growth/business operations and many of these businesses don’t have substantial unleveraged equity, retained earnings and/or a sustained profitable track record (historical balance sheet), but do have assets (land, buildings, equipment, accounts receivable, inventory) and a sound growth plan. These businesses more than likely won’t qualify for bank funding to fund their growth, but are ideal candidates for asset-based funders.
What types of companies and industries tend to turn to asset-based financing and what do those loans generally cover?
Eric Inspektor: Due to the cost and short-term nature of asset-based loans (pricing is higher than bank funding and the term is usually no longer than 2 years), this type of funding is best suited to manufacturing and distribution companies to assist their growth through equipment purchases and higher accounts receivable levels. Having said this, we’ve used this funding to assist many businesses, including real estate developers requiring bridge funding for acquisitions and the auto industry to finance vehicle inventory and automotive leases.
Are there any limitations related to how and when your type of lending can take place, or can companies employ this type of lending when they so desire?
Eric Inspektor: As I said earlier, asset-based lending is best suited to certain situations; however, many businesses are turning to this type of funding even when they would qualify for traditional bank funding because asset-based lenders are more proactive and, in my opinion, better qualified to underwrite business loans.
The business world has changed dramatically since last spring, when COVID-19 first appeared, forcing many companies to reconsider how they do business and when growth is feasible. How has the pandemic impacted your industry and your clients?
Eric Inspektor: While there are certain industries that may not survive this crisis, entrepreneurs are resilient, and this has led to a surge in applications for funding. Unfortunately, notwithstanding the government guarantees being offered to the banks to assist their clients, the feedback we are getting is that the banks are not being proactive.
Do regulations governing asset-based lending work differently across geographic boundaries, and if so, what do potential borrowers need to be aware of?
Eric Inspektor: While a large percentage of asset-based lenders are either partly owned by the banks or are funded through bank funding vehicles, they are not subject to the same regulations as banks. This allows them the ability to be real business lenders. As I’ve said many times, a borrower/lender relationship is a partnership and borrowers need to interview potential lenders to ensure that the lender funding them is the right partner.