Cadence talks about asset-based finance growth


Asset-based finance earned a bad rap decades ago.

As a financing tool that requires entrepreneurs to deposit valuable assets – whether working capital or property, plant and equipment – as collateral, asset-based finance (ABF) has often been seen as the solution to a serious problem when no other options were available.

“One of the stories of the asset-based loan was that it was a last resort loan,” said Norb Schmidt, executive vice president and director of capital finance at finance Cadence Business Finance. “From a wealth-based perspective, there was a stigma attached to borrowing.”

Over the years, the industry has improved that reputation as more sophisticated analytics technologies have enabled lower borrowing costs. For companies with cash flow clumps due to seasonality or other reasons, ABF can be a valuable tool for accessing capital – and it doesn’t have to be as risky for financiers as some might assume. As Schmidt told PYMNTS in an interview, the ongoing pandemic has further raised awareness of the value of ABF in helping companies through volatility without jeopardizing their banking relationships.

ABL flexibility

The financial challenges many companies have faced as a result of the pandemic may jeopardize their ability to obtain a traditional bank loan or other financing product. According to Schmidt, one of the greatest advantages of an Asset Based Loan (ABL) is that the financiers do not look at the income statement when making their assessment. Rather, the underwriting is based on the actual assets on the balance sheet.

“It really helps offset the effects of a pandemic or one of those market events,” he said.

Demand for ABF has increased slightly in recent months, he added, thanks to ABL’s ability to secure capital for companies when income remains uncertain. For the midsize businesses that make up Cadence Business Finance’s customer base, assets, including receivables and machinery, provide a solid foundation for asset-based financiers, even for companies in sectors like manufacturing, who are setting their business models amid the pandemic.

“A machining center will always remain a machining center and continue to produce parts, be it for the automotive or construction industry,” says Schmidt.

The flexibility of the manufacturing industry means that companies can relocate production without having to dispose of valuable assets that could open doors to capital. Today Schmidt said it is still on hold for some companies in the field that have been forced to cease operations or slow down. Asset-based financiers are also taking the same approach, although Schmidt is confident the ABL arena will remain in growth mode.

Blurring the finance lines

As this growth continues, more and more companies are finding themselves able to use ABL as a method to first Resort.

“Really high performing companies that have measured working capital needs, like the security that comes with an asset-based facility that says, ‘My working capital is X and that gets me Y for my borrowing ability,'” said Schmidt. “It gives companies this capital security when their first call is not their banker but their sales or operations department.”

This could be particularly valuable as some analysts believe banks will once again pull out of corporate lending in the face of economic uncertainty. However, that doesn’t mean ABF will overtake bank lending.

Rather, Schmidt predicts a progressive harmonization between traditional and asset-based loans.

“The line between commercial bank lending and asset-based lending is blurred,” he noted, explaining that some financiers are now combining financing products with an asset-based structure to lower the cost of capital and keep businesses on balance sheet financing despite cash flow volatility.

While ABF can still have negative connotations, the current market climate may provide a platform for the ABL industry to showcase its value to mid-sized companies. And as the ABL arena becomes more creative with the assets on which funding is based, Schmidt said companies with stronger balance sheets embraced the funding tool not out of desperation but out of a strategic path to capital.



About the course: The AI ​​In Focus: The Bank Technology Roadmap is a research- and interview-based report examining how banks are using artificial intelligence and other advanced computer systems to improve credit risk management and other aspects of their business. The playbook is based on a survey of 100 bank managers and is part of a larger series evaluating the potential of AI in finance, healthcare and other sectors.

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