The Wall Street Journal
By: Kyle Stock
February 2, 2010
'Last-Resort' Finance Option Gains Ground as Traditional Sources of Capital Dry Up; Cashing in on 'Crimson Tide'
When the University of Alabama booked its trip to the college football national championship in December, Weezabi LLC went into a hurry-up offense.
The three-employee company--one of the few licensed to make "Crimson Tide" merchandise--needed 60,000 T-shirts. Without the time to huddle investors, Weezabi pledged as collateral part of its future revenue to FTRANS, an Atlanta-based lender and credit analyst.
"If it wasn't for that loan, we would have missed the boat on all of this hot-market stuff," said Weezabi's chief executive, Seth Chapman.
Asset-based lending, once considered a last-resort finance option, has become a popular choice for companies that don't have the credit ratings, track record or patience to pursue more traditional capital sources.
Because asset-based lenders focus on collateral, rather than credit-worthiness, they do deals that more traditional lenders shy away from. Borrowers put up equipment, inventory, accounts-receivable and other liquid assets in exchange for the money. Drawbacks include relatively high rates, and the ability of lenders to legally seize assets if the borrower misses payments.
Asset-based lending, excluding mortgages, swelled by 8.3% to almost $600 billion in 2008, according to the Commercial Finance Association, an industry trade group. The association is still gathering data on 2009, but preliminary surveys show double-digit percent increases in lending. In comparison, syndicated lending in 2009 sagged by 39%, according to Dealogic Inc.
"We're no longer viewed as the lender-of-last-resort--let's put it that way," said Michael Sharkey, president of Cole Taylor Business Capital, a Chicago-area asset-based lender. "And we should really be viewed as the fireman of this crisis, because we took risks that a lot of companies won't take."
The asset-based finance industry is still dominated by Wall Street's biggest firms and almost all of those companies pulled back during the crisis. From 2007 to 2008, almost half of asset-based loan volume from the industry's top 25 firms disappeared.
However, those companies are quickly getting back in the game. They funded 23% more deals in 2009. Wells Fargo, which in 2008 acquired Wachovia--another big asset-based lender --shot to the No. 2 spot on the asset-based lending league table, lending 23% more than both companies combined had doled out in 2008. In December, Wells Fargo had $27 billion in outstanding asset-based loans.
Bank of America, the industry leader, has a lock on a third of the market. Meanwhile, JPMorgan Chase, the No. 3 asset-based lender in 2009, is expanding its 300-worker asset-based lending unit through the western U.S., a push that includes opening a new 10-person office in Irvine, Calif.
The initiative is already paying off. In recent weeks, the Wall Street giant injected capital into a California tomato-processor and a Seattle-based coffee-bean roaster. "These are exactly the kinds of businesses that we expected to help," said John Goldthorpe, an executive who heads JPMorgan's business credit unit. "We're absolutely committed to the lower end, as well as the higher end."
Still, as big banks slug it out for market share, a rash of boutiques and new players scooped up a lot of the demand that the bulge bracket deserted during the crisis.
TD Bank, a unit of Canadian-based TD Bank Financial Group, has grown aggressively in recent months and is looking to break into the "top tier" of asset-based lending, according to Barry A. Kastner, who was hired from Wachovia to head TD's asset-based lending practice.
"We think there's room for another significant player in the market," Mr. Kastner said. "Typically we see demand in the struggling industries...and pretty much everybody is struggling these days."
TD is also gearing up for an expected wave of mergers and acquisitions, deals that increasingly rely on asset-based loans to round out the financing.
Since it made its first loans in 2007, On Deck Capital Inc., a New York-based asset-based lender, has handed out $50 million to some 2,000 businesses, few of which had revenue of more than $3 million a year.
"The financial system has been focused more or less uniformly on the credit bureau, but had no system to take a broader look at the performance of a Main Street small business," said On Deck founder and CEO Mitch Jacobs. "Now, we're counting on these businesses to push our economy forward and this century-old problem is in the spotlight."
Many small businesses that seek asset-backed loans are distressed companies, or have spotty or short track records. Lenders tend to specialize in specific industries or lines of business, with an understanding of the particular collateral at stake--be it rolled steel, restaurant revenue or crimson T-shirts.
Cole Taylor's Mr. Sharkey says more lenders are interested in asset-based lending because they've hit rough patches themselves.
"Let's face it, every company in the country saw their results fall off a cliff last year; and a lot of banks have their own problems," Mr. Sharkey said. "There's just a lot of reasons for companies to be testing the [asset-based] market right now."
Who qualifies: Asset-based lenders prefer to work with companies whose collateral can be quickly turned to cash if need be. Restaurants, retailers and others that collect credit-card payments are popular, though asset-based lenders are putting up cash against patents, real estate and heavy equipment used in manufacturing and farming.
What are the terms: Asset-based lending rates are generally higher than those on traditional bank loans, but lower than most credit-card arrangements. Generally, the more liquid the asset put up as collateral, the lower the rate. Most asset-based lenders will only grant capital up to about 60% of the value of hard assets, and 80% of the value of accounts receivables.
What are the benefits: Asset-based loans can typically be obtained more quickly and with less credit quality and financial covenants than more traditional financing. Many asset-based lenders specialize in specific industries and are more willing to craft terms based on business cycles and other elements particular to those sectors. Some lenders offer additional services, like payment processing and collections.
What are the drawbacks: In addition to the relatively high rates, asset-based loans are secured; lenders can legally seize assets if the borrower misses payments. More traditional loans often offer more of a cushion in the event of dire financial straits.