CFA: Creative financing helping firms survive

Asset-based borrowing and factoring (lenders’ buying of debt), two often-overlooked financing tools, can help a company obtain the capital it needs to stay in business or fulfill a costly order before payment arrives, according to the members of a 65-year-old, international trade association that specializes in stable forms of alternative lending.
The Commercial Finance Association has 300 members and 16 chapters in the United States, Canada and Mexico, representing “the whole spectrum of lenders,” according to Brian Cove, chief operating officer of CFA, which is based in New York City.
Asset-based lending and factoring present “an opportunity for companies to look at their assets and see how they can use them,” Cove explained. The recession, coupled with a tightened credit market, means that asset-based lenders are fielding more financing requests than usual from “borrowers of all types,” Cove said.
According to Cove, there were $590 billion in outstanding asset-based loans in the United States in 2008, the most recent year for which figures are available.
In general terms, asset-based lending sees a company borrow funds against collateral in the form of inventory, equipment or accounts receivable. Factoring allows lenders to buy a firm’s debt at a discount. That allows a lender to provide immediate funds to the company that may be awaiting payment on a costly order or provide the company with funds needed to fulfill an assured order. Some lenders only do asset-based transactions, others do only factoring and some do both.
“Our asset-based lending customers have the flexibility of using their current assets as collateral to meet their working capital needs,” said Joseph Nemia, president of Citizens Commercial Finance in Providence and a past CFA chairman. “Simply stated, an asset-based lending customer has the ability to turn current accounts receivable and inventory immediately into cash to be used for business expansion, supplier payments, employee payroll and general business purposes.” “Many, if not most, of these customers are unable to qualify for traditional bank financing, due to economic conditions facing their customers,” Nemia said, “or they are growing very rapidly or need to make an acquisition to expand.”
Of course, if a business puts up its assets for collateral that means the lending institution will take a close interest in those assets. Some businesses may welcome the added attention, but others may not.
Another financial expert – Paul F. Kelly, national director of business development and asset-based lending for Sovereign Bank in Boston – pointed out that asset-based lending can bring “discipline” to customers because a business owner under the watchful eye of the lender must be certain to focus closely on cash coming in.
An asset-based lender will “closely monitor” collateral and day-to-day activities of the borrower, Cove said, even performing on-site field investigations to physically check the state of inventory where appropriate. “The business really does get to work hand-in-hand with the lender and develop a relationship with them,” Cove said.
At Citizens, Nemia said, assets and collateral are “closely monitored by our team of relationship managers that maintain a frequent dialogue with our customers.”
He cited the “frequency of the collateral reporting requirements” as “the only negative I can think of” from a borrower’s point of view. But, he added, “this aspect is more than offset by the immediate availability of funds and the overall flexibility to borrow on a revolving basis.” Businesses of all sizes can use asset-based lending for various loan amounts, Cove explained. The amount loaned generally depends on the lender, he said, with some lenders offering loans of any size and others specializing in the multimillion-dollar range. At Sovereign, Kelly said his division has a $5 million minimum, although smaller loans can be arranged through other departments.
Kelly stressed that the terms and structures of asset-based loans and factoring can vary depending on the lender and the borrower. Some lenders will provide only a certain percentage of the eligible accounts receivable, he said. Factoring can see a borrower receive a percentage of the amount owed on an outstanding order, with the factoring institution responsible for collecting the full amount at a later date, Cove said.
Regarding CFA, membership consists of 24 percent banks and 76 percent nonbank financial institutions, including the asset-based lending arms of domestic and foreign commercial banks, small and large independent finance companies, floor plan financing organizations, factoring organizations and the financing subsidiaries of major industrial corporations. The CFA has a monthly magazine, an e-mail newsletter, and regularly hosts conventions, meetings and educational events.
The CFA Web site (www.cfa.com) contains industry information for members, industry service providers and those seeking financing.
“The benefits of [CFA] membership are many,” Nemia said. “Education is the centerpiece of CFA, which provides numerous courses on asset-based lending to promote development of industry members. Over the years, many of our Citizens colleagues have taken advantage of the CFA course offerings and will continue to do so.” &#8226