With bank loans harder to come by, more small companies are turning to asset-based lending. When credit was flowing more freely, many small businesses gravitated away from collateralized loans. It's easy to see why. Few people want to pledge their assets. And the fees are pretty high. But times change.
Now that credit is tight again, it may be harder to develop a relationship with these lenders. Historically, asset-based lenders have existed to provide collateralized loans to people who can't meet the conditions for a cash-flow-based loan. Ideally, you would have cultivated these folks in good times when you didn't need their help so much.
The good news is that while many asset-based lenders are part of large financial institutions, many are mom-and-pop operations, some of whom have an affinity for small businesses because they are also small-business owners or were at one time. “They have more of a feel and understanding of what managing a small business, especially during hard times, is really all about,” John Percival, an adjunct professor of finance at Wharton. They're much more likely than bank lenders to be there for you in good years and in bad years.
Here are Percival's tips for optimizing your relationships with asset-based lenders.
1. Find a local company, not a national operation.
Ideally, it will be one run by its founders or at least one that was entrepreneurial at one time. Shop around in your local area. You can get a list of asset-based lenders through the trade organization, Commercial Finance Association. Compare interest rates, up-front fees and how often they'll check on invoices.
2. Manage your relationships for the long run.
Don't try to take advantage. “You may need these people when things are a little tough for you,” says Percival. Take time to meet with them and talk to them. “Find people that you feel comfortable with.”
3. Try to understand their point of view.
Often small and mid-size business owners are reluctant to build long-term relationships with asset-based lenders because the conditions on the loan for validating revenue or inventory seem onerous. They're used to dealing with relatively small businesses that are risky. Take the tough terms as a sign that they're a good asset-based lender, and they're more likely to be around for you when you need them.
You may find asset-based lenders welcome your overtures more than a bank would. Because asset-based lenders monitor your collateral closely, they need to trust you. “They have a claim on your assets. You're not going to lie to them,” Percival says. Given the amount of fraud that occurs -- fake revenues on nonexistent inventories – these lenders go out and check up on a business in person. “They're a lot more likely to do business with people they trust.”