The Difference Between Bank Asset Based Loans And Private Asset Based Loans

The Difference Between Bank Asset Based Loans And Private Asset Based Loans

Huntington Beach, CA  Owning a business takes a lot of cash on hand. Cash to make payroll, pay rent (or a commercial mortgage), purchase supplies, marketing and advertising, etc. Business owners reach out first to the bank they have their business deposits with to see if they can provide them with a loan. Their bank is a good place to start, and if they can qualify, their journey ends there.

Different types of asset based loans.

Asset based loans can be made against any asset seen on a company’s balance sheet. The common assets used as a collateral for a loan are real estate loans, equipment loans, inventory and accounts receivable. Other collateral considered assets by a lender are purchase orders and supply chain funding lines.

Asset Based Loans Obtained From Banks. 

Banks provide asset based loans, but have stricter requirements than the private sector. The first difference you will notice is that a bank will most typically require you to open a deposit account with them in exchange for doing the loan. Depending on the size and type of asset based loan, the bank will require you to switch you entire banking relationship over them as a requirement for doing the loan. Switching your banking relationship is no easy or convenient task.

If deposits are not required, that means that the bank will look to fit you in to an SBA loan program. Banks mainly offer term loans under the SBA loan program versus revolving lines of credit. Loans made against accounts receivable, purchase orders or for supply chain funding are not on the menu for most banks.

The preferred type of asset based loan banks like to issue are for real estate and equipment purchases. The range of your required down payment will depend on the type of loan being considered, your business and personal credit and the amount of liquidity you have on hand post purchase. Most banks set their bottom limit at a 680 credit score or better to be considered for an asset based SBA loan.

Private Sector Asset Based Loans. 

In the private sector the whole credit picture is also considered, but not scrutinized quite as closely. The main consideration is the asset quality itself. For example, in an accounts receivable loan, the credit quality of customers, average collection days and historical bad debt write offs are of paramount importance. The private lender will look at business and personal credit scores and evaluate the company’s financial position, however they will also listen to the story. Many business owners have lower credit scores because all of their cash has gone in to their business and this sometimes creates issues meeting their obligations on time. The private asset based lender understands that an asset based loan will improve the company’s cash and allow them the growth opportunity they wouldn’t otherwise have without access to capital. This especially true when considering loans to finance purchase orders or establish a supply chain line of credit.

What Asset Based Loan Is Right For Your Business? 

Our advice is to always check with your business bank first. They are the ones that have the experience with your business and it’s always prudent to confirm their ability to assist.

The facts are that most business owners do not qualify for bank loans. This is the reason there is a market for the private asset based lender. Private capital can be used as a bridge or as a permanent financing for those that prefer less oversight from their lending partner.

What Value Does Huntington Coast Capital Bring?

In a word, experience. We have decades of experience in the private capital and institutional capital markets. We navigate our clients through the options, saving them time and when finding the right asset based lending partner for their business. If your business could use some additional capital to purchase equipment, real estate or to finance growth opportunities, we would like to speak with you.

Call us to learn more 714-719-8966.

What An Asset Based Loan Can And Can Not Do For You

What An Asset Based Loan Can And Can Not Do For You

We occasionally receive calls from people who are looking to buy a business. The advice when seeking an asset based loan is always to target a company with at least some assets. Service companies such as accounting or legal practices for example, typically do not have hard assets that they use on a daily basis. This disqualifies the possibility of an asset based loan assisting in the purchase of the company.

What assets do lenders like to use as collateral for their loan? Essentially, any asset found on a company balance sheet can be used as collateral for a business purchase. These assets include accounts receivable, inventory, equipment and real estate. Ideally, a company has more than one of these available to be used as collateral for the lender.

When dealing with a new business acquisition loan request, the first course of action is to explore the SBA loan program and see if you can qualify for a government insured loan. The advantage of this loan is the low down payment of 10 percent required from the buyer. The disadvantage is that the SBA loan program is difficult to qualify for. The underwriting guidelines review the target company tax returns to ensure that the company can take on the additional debt used in purchasing the business. Tax return analysis is the most conservative form of cash flow analysis because everyone looks to minimize profits on their tax returns to avoid paying high taxes.

Secondly, the SBA is also required to take outside collateral when making a loan. This usually means a 2nd position on the buyer(s) residence. Not all applicants own a home, or if they do, have equity to offer in the home. The psychological effects of placing your home as collateral can also be a bit intimidating.

If the applicant can not qualify for an SBA loan, there are private money solutions available. Asset based lenders outside of the SBA program are a bit more flexible. They look at the collateral of the business and see what cash can be taken out of the existing assets. For example, if a company owns equipment and real estate, can those assets be leveraged and applied toward the purchase price? Another popular way of purchasing a business is through factoring the accounts receivable. Invoice factoring companies are asset based lenders focused strictly on the accounts receivable of the business to be acquired. By factoring the accounts receivable, they can make additional cash available for the purchase. For example, if a company has $1,000,000 in open accounts receivable a cash availability of up to $850,000 can be made available for the purchase.

The last piece is what is referred to as a “seller carry back.” This is simply an amount of the purchase price that the seller agrees to accept over the course of a payment plan agreed to between buyer and seller. Asset based lenders view this as equity, but also prefer that the buyer has cash to bring in to the purchase. Cash investment from the buyer is important because it keeps them invested in making the acquisition a success. If the buyer has no capital at stake personally, it is easier to walk away from a failed acquisition. Buyers prefer 100% financing and lenders want some “skin in the game” in order to keep the borrower invested.

Asset based loans can make your business acquisition goals a reality. However, buyers need to be realistic in their expectations. If a buyer has zero capital to put down towards the acquisition or the company targeted for purchase has zero assets, the likelihood of success is very slim.

Advice: if you are looking to acquire a business using mostly outside capital, make sure the business has hard assets and you have a portion to apply to the purchase price. What was not mentioned previously is buyer experience. You should also have some experience in the industry your acquisition is in. For example, purchasing a repair shop and have adequate prior experience as a mechanic.

If you would like to talk about acquiring a business, give us a call 714-719-8966.

To you success!

Patrick Zazueta
Huntington Coast Capital, Inc.