A Question and Answer Session with
Jim Merrill, Vice President, Deutsche Financial Services
As they expand, computer equipment distributors and resellers, as well as manufacturers, often have to manage higher levels of assets associated with their revenue growth. Like any fast-growing business, many of these companies are faced with the challenge of finding additional capital to support their explosive expansion.
Some businesses are fortunate enough to find investors to put a substantial amount of equity into their company to fund growth. But most must rely on borrowing to support their expansions. All too often, these companies find that traditional bank lending sources just aren’t set up to provide the level of funding needed to support a rapidly growing company.
Increasingly, technology industry companies are discovering that asset-based financing—loans and lines of credit secured by inventory, accounts receivable or some combination—can be the right solution. They have found that firms who specialize in this type of funding and serving technology companies are often more capable to extend credit and provide greater flexibility.
Garry Merrill, Vice President in the Technology Division of Deutsche Financial Services, reflected the perspective of one of the leading industry dedicated finance companies serving the IT channel during a recent question and answer session about asset-based financing:
What is an asset-based loan?
Simply put, asset-based loans use certain assets of the borrower as collateral. For computer equipment distributors and resellers, the collateral is typically inventory or accounts receivable. More recently, revolving credit lines based on both inventory and accounts receivable have emerged as a powerful way for IT companies to maximize their available credit.
Are these loans based solely on the value of the assets used as collateral?
Asset-based loans are secured by assets and the valuation of those assets will dictate how much cash the borrower can draw out of their credit facility. However, most lenders base their lending decisions first on the cash flow and profitability of the company, then look at the collateral as a secondary source for repayment.
What type of companies should be looking at asset-based loans?
Rapidly growing companies and companies with leveraged balance sheets (typically those with a debt to worth ratio of 3:1 or higher) should definitely consider asset-based loans for the working capital they need to run their businesses. Many of these companies will find that traditional financing available from commercial banks and generalist lenders won’t provide enough working capital support to meet their needs.
Who offers asset-based loan programs for IT companies?
There are a number of general asset-based lenders in the marketplace that have different specialties or take a different approach to risk management and underwriting. These include primarily non-bank commercial finance companies as well as the business credit divisions of large commercial banks.
There are also industry specific finance companies dedicated to providing IT companies with a wide range of financial services, including asset-based loans. Industry associations such as CompTIA and the Commercial Finance Association can provide information about finance companies.
What are the advantages of an asset-based loan vs. more conventional financing?
For a fast-growing or leveraged company, an asset-based loan will usually provide more cash availability than traditional cash flow or balance sheet loans. That’s because a company can generally obtain an advance of up to 85 percent of their eligible accounts receivable and 50 percent of the cost or appraised value of their inventory. There are also several channel-specific programs available to help fund a company’s cash flow cycle.