Asset-based Lending Steps into the Limelight

Another reason is a desire to protect their customers. When asset-based lenders accept a small business's accounts receivable as collateral, terms of the agreement may call for the lender to collect the invoices. Some lenders can be pushy and even abrasive in demanding their money, which can potentially damage a small company's vital customer relationships.

One possible solution to some of the problems with asset-based lending may have been introduced by The Receivables Exchange, a New Orleans-based online service for borrowers and lenders in the asset-based market. Real-time trading of asset-based loans helps bring costs down, according to Nicolas Perkin, president and co-founder. "We have rates as low as just under 1% for 30 days," Perkin says. Interest rates may go as high as 3%, he added, depending largely on the quality of the receivable. A receivable payable by a large corporation, for instance, is considered more valuable than one owed by a less well-established company.

Perkin says the marketplace has registered approximately 750 borrowers and more than 100 lenders, including hedge funds, family offices of wealthy clans and institutional sources of capital. Lenders can be anywhere on the globe. Borrowers, currently from 45 states, must submit an application and go through a registration process that can take two days.

Approved companies can list individual invoices and set their own price to start the bidding. That's different from conventional asset-based lending, which doesn't allow companies to pick and choose which accounts receivable they'll turn over to lenders as collateral, Perkin says. This difference enables small firms to control which customers they potentially expose to collectors. In the absence of a default, The Receivables Exchange allows small companies to retain control of their invoices and do the collecting themselves. That's another difference between this and factors and other asset-based lenders.

The Receivables Exchange collects a commission on each transaction to fund its own operations. The company has been growing rapidly since launching in late 2008, Perkin says, and recently landed a $17 million third-round venture investment from a group led by Bain Capital. The money, the latest in a total of $30 million in investment funds it has received, will be used to improve its offering and for marketing efforts to increase awareness of the service availability.

Another wrinkle in the asset-based world is that The Receivables Exchange does not require borrowers to personally guarantee their loans, Perkin says. Instead, lenders require only that the receivables backing up the loan be of good quality.

The Receivables Exchange isn't for every company. Only those with at least $2 million in annual revenues can apply. There's more room on the upper end. Perkin says their largest borrower has $200 million in annual revenues. Companies also need to have bankable receivables. That means they have to be business-to-business, rather than business-to-consumer. And the better known and more established their customers, the more bankable their receivables are.

Other than that, there are few barriers to entering this borrowers' marketplace. Perkin says members are in 47 different industries, including media, technology, manufacturing and services. "It's pretty much any business-to-business company," he says. He estimates there about 4 million small- to medium-sized businesses, representing a multi-trillion-dollar market, in The Receivables Exchange's target market.

Companies that clear the hurdles can get access to cash quickly. The cash from an asset-based loan handled through The Receivables Exchanges can show up in as little as two or three days, the company says. That should provide enough breathing room to cover payroll, inventory, essential supplies, or other urgent needs for all but the most desperate of small firms.

While commercial banks and other traditional small business lenders may eventually decide to actively lend to small companies again, Perkin believes the shift to a much greater emphasis on asset-based lending has already begun. Once small companies turned away by bankers have experienced the ease and convenience of borrowing through services such as his, he predicts many won't go back to their former reliance on conventional lenders. "It's really just a question of at what point does it become the mainstream tool for people to finance their businesses," he says.

If small firms are indeed able to tap more easily into the value represented by their accounts receivable, it could represent a significant boon to entrepreneurs. The Receivables Exchange estimates that most businesses have in excess of 60% of their working capital in accounts receivable. The faster and less expensively they are able to turn that into cash, the easier it is for them to fund their own growth.