Evaluating Asset Based Lenders

(TMA International Headquarters)

When your client’s company needs working capital, but banks can’t or won’t help, alternative sources of funding are available. Asset based lenders are one possible source; they’re not regulated like banks and can step in and help troubled companies that have outgrown their bank’s willingness to extend credit.

Evaluating Lenders

The question then becomes which asset based lender to choose. Because asset based lending is an unregulated industry, it’s important that lenders are checked out with as much diligence as a turnaround manager would use to investigate prospective employees. As is the case with any industry, there are always going to be a few unscrupulous people who will try to take advantage of companies in tenuous situations. The following are several proven ways to help protect your client:

Verify that the lender is a direct lender . You want to confirm that the lender you’re considering is a direct provider of funds, not a middleman or broker who has to get the money elsewhere. You want all contractual arrangements for the repayment of funds to be directly between your client and the lender.

Meet with senior management. These individuals are the decision-makers. Be sure they have strong backgrounds in asset based lending and have the ability to assess and understand your client’s situation in order to provide exactly what your client needs. In addition, assess the depth of their expertise. Everyone involved with the day-to-day operations of your client’s account should be adequately familiar with lending regulations and practices in order to avoid unnecessary problems down the line.

Check references. And, go beyond just checking the lender’s client base. Many asset based lenders get the majority of their clients through referrals from bankers, CPAs, attorneys and turnaround consultants. Talk with some of these professionals about the asset based lenders you’re checking out and see what they have to say. Even if they have no direct experience with a particular lender, chances are they’ll know how that lender is perceived within the industry.

While you’ve been checking out the lender, they have been assessing your client’s needs and in all likelihood, have provided you or your client with an initial proposal. When a lender meets with your and your client’s satisfaction, and your client is comfortable with management and the personnel who will be assigned to the account, efforts can then be directed toward evaluating other issues which are also critical in the selection process. It’s unfortunate, but when evaluating a lender’s proposal, many professionals focus on the interest rate quoted as the primary issue in choosing an asset based lender when, in fact, many other issues are at least as, or even more, important.

Value-added Benefits

One of the most important things to keep in mind is that asset based lenders are selling a commodity—money. And, everybody else in town has the same commodity. It becomes a question of what the lender does to add some value to turn a lending transaction into a relationship. That’s not to say that the cost of funds is not important; however, the lender’s willingness to provide sufficient funds structured to the company’s needs, along with people to help utilize the funds properly, are actually more important. After all, if a company doesn’t get the right amount of money and help with how to use it, then it really doesn’t matter what the money costs. The turnaround professional can be of great help in assisting their client in keeping the cost of funds in perspective and in evaluating all of the issues to determine what’s truly best for their individual situation. With that in mind, the following are some additional issues to consider when evaluating asset based lenders.

Is the lender flexible? Will they structure the loan to meet your client’s specific needs? Some lenders are more creative than others and will look for ways to make the deal work when others will not.

How long is their response time? How quickly can the lender provide initial funding? What some lenders say they can do, and what they actually do, may be decidedly different. See what the lender has done historically by asking clients, and by specifically asking the lender, to tell you the average turnaround time for all clients, from initial contact to receipt of funding.

How accessible is senior management? When your client needs an over-advance, will fast answers and funds be available when needed?

What will be the nature of the relationship? Will personalized attention be provided by people with a reputation for honesty, integrity and who work to help their clients re-qualify for traditional bank financing?

Is the lender more than a lender? Do they offer a value-added benefit of providing insight that will help your client improve the company’s financial processes?

There are many important issues to consider when evaluating asset based lenders. When you take a look at all of the issues and compare one lender to another, choosing the right one will be much easier than you think.