According to the Commercial Finance Association (CFA), asset-based lending experienced only a slight decrease in the final quarter of 2008. The CFA did not find this surprising or disconcerting in light of the dramatic growth in asset-based lending during 2008. Essentially, the CFA views the industry as quite stable compared to standard leding institutions and the rest of the economy. Andrej Suskavcevic, CEO of the Commercial Finance Association, actually referred to asset-based lenders as “a lifeline for the global economy.”
Asset-based lending is the practice of extending funding to a business based on using existing assets as collateral. It is normally utilized by companies that are highly leveraged financially and have limited cash flow. Typically, the types of assets used as collateral are accounts receivable and inventory. Each of these assets has a fixed book value and factors will fund about 80% of this amount providing cash to a company faster than normal lending channels. However, the cost of leveraging assets is generally higher that a traditional commercial loan or line-of-credit. But even with these higher costs, asset-based lending has become an important method of providing small businesses with the opportunity to stay cash healthy as they move forward and grow their businesses.
I love the “lifeline for the global economy” reference. Who would have ever thought that asset-based lending would save the world!
