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Why Asset-Based Loans Are Booming

THe NJBIZ Interview-Bruce H. JonesCertain businesses, including those that aren’t turning enough of a profit to qualify for a bank loan, find themselves turning to asset-based lenders for funds. These financial institutions, which are also known as secured lenders, primarily look to the value of a business’ machinery, inventory and other property to guarantee repayment. Many asset-based lenders are represented by the Commercial Finance Association, (CFA), New York City-based trade group. NJBIZ Staff Writer Martin C. Daks spoke with Bruce H. Jones, a South Brunswick resident who was reelected in October to his fourth one-year term as executive director of CFA, about the attractions and challenges associated with asset-based lending.

NJBIZ: How big is the market for asset-based lending?

Jones: At the end of 2004 [2005 figures are being compiled], asset-based financing had pumped about $362 trillion into the world’s economy, up about 8.3% from 2003. This is basically composed of revolving funds. For example if a financing company has $10 million to advance and it loans the money out 10 times, it creates $100 million of economic activity.

NJBIZ: How many members does the CFA have?

Jones: As a trade association our members are companies, not individuals. We have 265 corporate members across the globe.

NJBIZ: What kind of companies?

Jones: They’re all secured lenders. Some are small, entrepreneurial finance companies, while others are mid-size and large banks and subsidiaries of industrial corporations like General Motors Acceptance Corp. or General Electric.

NJBIZ: How does secured lending differ from any other kind of lending?

Jones: An unsecured loan is based on a borrower’s financial history. In contrast, our members go in and value the assets of a borrowing company [to serve as collateral that can be sold if the borrower defaults]. They can consist of a variety of things including real estate, equipment or intellectual property.

NJBIZ: Why would a borrower go to a secured lender instead of a traditional bank?

Jones: Sometimes a young company may not have enough of a financial history to qualify for an unsecured loan. Or it may not be able to get the level of money that it needs. An asset-based lender may be able to provide a higher level of funding if the assets are there. And in some cases, like the garment industry, factoring is traditionally used as a way to provide financing.

NJBIZ: How does that work?

Jones: Factoring is probably the oldest form of secured financing. Say a small manufacturer contracts with a retailer to create 100,000 dresses; the manufacturer may have to wait up to 90 days after delivery until he gets paid. In the meantime he needs money to make payroll and to start setting up for the next production run. A factor will buy the receivables from the manufacturer at a discounted price, and will then collect the payment from the retailer.

NJBIZ: Do other kinds of smaller business use this kind of financing?

Jones: There are a lot of small factoring companies throughout the country that are helping to finance small businesses. For example, in New York City’s Wall Street area, where a lot of companies work late into the night, often past midnight, there are many car services to take employees home. The car service is typically paid once a month, and may sell its receivables to a factor to get paid up font. It helps these small companies improve their cash flow.

NJBIZ: Does an asset-based loan carry a higher rate?

Jones: The rates are somewhat higher, but not by much. It’s really a question of whether a borrower can get the kind of money it needs to create what it wants.

NJBIZ: Does an asset-based loan present any problems for a lender?

Jones: At one time, a borrower could go to a finance company, say in New Jersey, and pledge collateral, and then take the ferry across the river to New York and pledge the same collateral to another finance company. Now, with computers, a lender can easily check across the country to see if the collateral has already been pledged. That sped up this kind of lending and gives lenders the ability to do business nationally. There are still problems securing loans internationally, where other countries may have different sets of laws.

NJBIZ: How difficult is it to value the collateral in an asset-based loan?

Jones: Lenders have field examiners who go out and actually inspect samples of the collateral. In addition to determining the value, they want to be sure it’s really there. So if a manufacturer wants to use its TVs as security, the examiners will go to the company’s warehouse and randomly open a few boxes to be sure they’re really packed with TVs. And they’ll plug a few in to be sure they work.

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