1. 44 February 2013
A New Jersey Business Special Feature
Learn the efficiencies and cost advantages of this financing method.
By Kevin Berrigan, Contributing Writer
The Benefits of
Asset-Based Lending
I
n a still tepid economy, many New Jersey companies and
large corporations are turning to alternative sources of
funding such as asset-based lending (ABL), to finance
their day-to-day operating expenses, or obtain capital
for restructuring, turnarounds, mergers and acquisitions
and buyouts.
In its simplest form, ABL is any kind of lending se-
cured by an asset. This means, if the loan is not repaid,
the asset is taken. In this sense, a mortgage is an example of an asset-
backed loan. More commonly, however, the phrase is used to de-
scribe lending to everything from small, entrepreneurial and start-
up businesses, to large corporations using assets not normally used
in other loans. Typically, these loans are tied to inventory, accounts
receivables, machinery and equipment.
A Publication of the New Jersey Business & Industry Association

2. New Jersey Business 45
At Wells Fargo, eligible collateral
also includes real estate and a strong
brand as assets to consider. “If you
have a strong brand, we would ap-
praise the brand and make an asset-
based loan on its value,” according to
Scott. D. Ryan, managing director of
capital finance at Wells Fargo. Other
types of assets could include contracts
with recurring revenue.
Since both accounts receivable and
inventory are renewed throughout the
year at periodic intervals, however,
they are in the favored classification of
eligible collateral. “They are just easier
to value,” Ryan says.
Asset-based lines of credit are main
attractions in today’s competitive busi-
ness world because of an increasingly
flexible loan structure at an attractive
price with fast and steady funding pro-
visions, he continues.
John DePledge, senior vice presi-
dent, head of business development,
for the asset-based lending group at
TD Bank, agrees. “Since ABLs supply
a continuous flow of cash by means of
revolving lines of credit, ABLs provide
financial support and stability to the
day-to-day operations of commercial
borrowers. In most cases, each bor-
rowing company’s credit line is deter-
mined by the combined worth of its
assets,” he says.
In many cases, businesses that use
ABL as a funding source are under-
capitalized companies that have good
performing receivables and are grow-
ing faster than their cash flow intake,
says Brian Cove, COO at Commercial
Finance Association (CFA) in New York
City. Founded in 1944, the CFA is the
international trade association dedi-
cated to the ABL and factoring indus-
tries.
Often, asset-based lenders such
as Wells Fargo, TD Bank and regional
banks provide asset-based loans when
the normal routes of raising funds,
such as the capital markets (selling
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3. 46 February 2013
>>>The Benefits of Asset-Based Lending
bonds to investors) or normal unse-
cured or mortgage-secured bank lend-
ing is not possible due to a company’s
shallow sales history or restructuring
situations, DePledge says.
“Asset-based lending has experi-
enced modest growth from the depths
of the recession,” he adds. “Asset-based
lending is used by many types of busi-
nesses that understand the efficiency
and cost advantages to an asset-based
loan structure.”
According to the CFA, New Jersey
ranks eighth in the United States and
third in the northeast for businesses
that use asset-based lending to finance
their operations, Cove says. Nation-
ally, only California, Texas, New York,
Illinois, Florida, Georgia and Pennsyl-
vania ranked higher.
With nearly 300 member compa-
nies and 16 chapters located through-
out the United States, Mexico and
Canada, CFA members include a di-
verse collection of lending institutions
that range from international banks to
independent entrepreneurial finance
companies.
As of 2011, New Jersey had 264
businesses taking advantage of ABL
funding packages in a broad range of
industries, including retail, food, IT,
healthcare, pharmaceutical and tex-
tiles, with the majority being small and
mid-sized businesses, according to a
report compiled from information pro-
vided by the CFA’s 25 largest member
organizations, Cove says.
He also says that ABL appears to do
equally well during an expanding or
contracting economic climate, but es-
pecially in a stagnant economy.
“During an economic downturn,
banks tend to tighten their commercial
loan belts, while asset-based lending
continues to be popular because the
lender bases the loan on the value of
the collateral and uses a different cri-
teria than a commercial loan officer,”
Cove says. “Its flexibility and monitor-
ing policies make it appealing for both
borrower and lender. An asset-based
lender will value the collateral, moni-
tor the collateral and claim it if the bor-
rower defaults. Asset-based lending
is a very disciplined funding source
which makes it easier to lend when
times are tough.”
Wells Fargo confirms the CFA view-
point. “Amid an uncertain economic
climate, like our current economy, as-
set-based lending tends to flourish be-
cause it is more consistent than com-
mercial loans,” Ryan says. “The CFO of
a company can sleep well at night be-
cause he or she has the comfort to run
the business without worrying about
the ever-present fluctuations of the
business cycle.”
Unlike traditional bank debt that
relies heavily on balance sheet ratios
and cash flow projections as loan cri-
teria, asset-based lenders will evaluate
a client’s business assets as its primary
focus to establish the borrowing base.
The result is usually far greater borrow-
ing power than can be achieved from
a traditional cash flow banking ap-
proach or commercial loan, DePledge
says.
Asset-based lenders such as Wells
Fargo or TD Bank assign a business a
revolving line of credit based on a per-
centage of each of the qualifying asset
classes. The business can draw on the
line of credit whenever needed and
pay back to increase availability for fu-
ture use. “You only pay interest on the
funds you’ve drawn down so, overall,
it’s less expensive than a term loan,”
Ryan says. Both Wells Fargo and TD
Bank charge an average annual ¼ per-
cent unused line fee for the balance of
the loan which has not been used.
ABL institutions typically perform
an evaluation of the prospective cus-
tomer’s assets to determine the ap-
proved amount of revolving funding.
A common approved advance amount
on the borrower’s accounts receiv-
able collateral is 85 percent of the total
value of the receivables, according to
Ryan. Often, DePledge says, at least up
to 65 percent of inventory value will be
approved as a lending amount against
the value of the inventory.
The majority of businesses seeking
financing today qualify for monetary
advances of between $5 million and
$2 billion. The prevailing interest rate
John DePledge, of TD Bank,
says, the bank “definitely
wants to grow its asset-based
loan business because it’s
another lending product that
lets us showcase ourselves as
a thought leader and valued
advisor.”
Brian Cove, of the
Commercial Finance
Association (CFA), says that,
based on association data,
New Jersey ranks 8th in the
United States and 3rd in the
northeast for businesses that
use asset-based lending to
finance their operations.

4. New Jersey Business 47
at Wells Fargo for asset-based loans is
1.5 percent to 3 percent. Normally, the
capital finance group’s customers need
to generate total revenue between $10
million to $20 billion to be considered
for an asset-based loan.
As long as a company maintains a
certain amount of liquidity/availability
in its business operation, it is common
for borrowers not to have financial
covenants tested, Ryan says. “For ex-
ample, if a company has a $40-million
credit facility and it has $8 million in
liquidity/availability, it often will not
have to worry about meeting specific
financial metrics (e.g. financial cove-
nants) until that number drops below
$8 million,” he says.
TD Bank offers many different
funding packages which cover lower,
middle-market domestic customers
as well as multi-billion-dollar, multi-
national customers. TD Bank, which
provides asset-based loans to a signifi-
cant number of New Jersey businesses,
makes available asset-based target
loans that range from $15 million to
$350 million and focus on middle mar-
ket and large corporate borrowers. The
bank’s interest rates for asset-based
loans range from 1.75 percent to 3 per-
cent.
“If we were to value a company’s
assets at $18 million, we may be in-
clined to offer an asset-based loan
from $20-$25 million to allow room to
help the company grow or to weather
the seasonal ups and downs of the
business,” DePledge says. “TD Bank
definitely wants to grow its asset-based
loan business because it’s another
lending product that lets us showcase
ourselves as a thought leader and val-
ued advisor.”
Frequently, a business signs a
multi-year asset business loan because
it doesn’t want to have to renegotiate
the loan each time it needs additional
funding. “That is why we may approve
a loan amount higher than the value of
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5. 48 February 2013
>>>The Benefits of Asset-Based Lending
the collateral,” DePledge says. “It’s done for efficiency to
provide the borrower with flexibility for growth and to ac-
commodate the borrowing needs of the business.”
DePledge believes one reason asset-based loan pric-
ing is lower than cash flow lending or commercial loans
is because losses are generally insignificant for the lender
due to the enhanced reporting requirements concerning
the assets. Therefore, the borrower is able to get a better
rate on the loan.
“Due to the robust reporting requirements, the asset-
based lender is able to keep his finger on the pulse of the
business environment and react to problems that may
occur more quickly than the middle-market loan envi-
ronment,” he says.
Wells Fargo provides asset-based loans to 75 compa-
nies in the Garden State that run the gamut from small
and mid-sized businesses to large corporations in indus-
tries such as manufacturing, transportation, logistics,
retail, distribution and retail industries. At press-time, it
has 15 prospective New Jersey businesses seeking asset-
based funding.
There are also very few instances when assets actually
have to be claimed, according to DePledge. “The asset-
based loan class performed very well in the recession,”
he says. “As a result, there have been few instances where
TD Bank had to recover its loan by realizing against the
assets. Traditionally, asset-based loans have a low loss
history and adequate returns.”
At one time, asset-based loans were the last avenue
of business financing possibilities, DePledge says. Yet to-
day, they are one of the more frequently used methods
of funding for companies lacking an operational track re-
cord or acceptable credit rating. Especially for young and
growing businesses, asset-based financing is often the
best available option. “The product has developed over
the past 30 years since I have been in the business,” De-
Pledge says. “It does not have a negative stigma as it did
in its early days.” NJB