Observers Despite risks, asset-backed loans may help Sun shine

//August 21, 2009

Observers Despite risks, asset-backed loans may help Sun shine

//August 21, 2009

Bank execs will emphasize high-value collateral to avoid getting hurtIn advertisements, Sun National Bank likes to portray itself as a smart, solid bank, with taglines like, “While other banks are getting back on their feet, we’re off and running.” With Sun’s latest move, a foray into asset-based lending, the Vineland-based institution will get a chance to put its money where its mouth is.

Following some training and other administrative work, representatives from the recently launched Sun Bank Business Credit are fanning out this week, seeking to do some deals.

“Because of today’s economic environment, many banks and finance companies have tightened credit policies, and some have retreated from the asset-based lending arena altogether,” Bruce Dansbury, Sun’s chief operating officer and chief credit officer, said Aug. 6 when he announced the new division. “Given both of these factors, asset-based lending is an excellent opportunity for Sun to serve the needs of our expanding base of business customers.”

Dansbury said the new division also offers opportunities to “cross-sell additional business solutions, like our cash-management services.”

In a traditional financing deal, a lender will primarily focus on a borrower’s cash flow, net income and other metrics that point to its ability to pay back the loan. As a backup, the bank or other institution likely will ask the borrower to put up machinery and equipment, inventory or other assets as collateral, or security, in case the company defaults on the loan.

An asset-based lender won’t ignore net income and other indicators, but it will assign a lot of weight to the borrower’s assets, typically lending against a percentage of their value.

The additional source of funding is always good news for business borrowers, said John E. McWeeney Jr., co-chief executive officer of Cranford-based New Jersey Bankers Association.

“Any company that has accounts receivable, inventory or machinery and equipment may be a candidate for an asset-based loan,” he said. “But it also requires the lender to work a bit more at valuing the assets and monitoring them, so asset-based financing may cost a [borrower] a bit more than traditional financing would.”

It can also expose the lender to more risk.

“Usually, a company turns to an asset-based loan because it got turned down for traditional financing,” said Andrej Suskavcevic, CEO of the Commercial Finance Association, an international trade association focused on asset-based lending.

“So, upfront, an asset-based lender is taking on a bit more risk. Of course, the asset-based lender also has more collateral, but valuing it accurately, especially in this recession, can be a challenge,” Suskavcevic said.

Sun Bank said it’s taking no chances on that front, having hired Drew Neidorf — a former CIT Finance Group executive with 30 years’ experience in asset-based lending—as director of Sun Bank Business Credit.

“When we make a loan, we do so with the expectation that the borrower company will be able to pay it back through its earnings,” he said, adding that Sun’s focus is on small- to medium-sized companies. “But we’re focusing on firms that have high-quality assets. We’re not getting mixed up in risky loans, like some lenders did.”

This means, for example, that he’ll stay away from so-called junior debt that does not have first dibs on an asset in case of a default. Sun Bank Business Credit will also steer clear of mezzanine financing, or a layer of new debt that’s sandwiched between existing debt.

Neidorf said the weak economy offers opportunities for a new asset-based lender “at a time when businesses demand and appreciate banking partners who offer more flexible alternatives to help them grow.”

Noting that the New Jersey, New York and Pennsylvania markets offer “more than $100 billion of asset-based loans outstanding,” Neidorf said, “we believe Sun Bank Business Credit will take advantage of market opportunities and strongly complement the bank’s already broad scope of banking and finance solutions.”

E-mail to [email protected]