Sterling's Gannon says that to successfully negotiate an asset-based deal, borrowers must come to the table with financial information that paints a positive picture and is detailed and accurate. Among the requirements he cites:
- The business must have a reasonable net worth and long-term viability.
- Financial statements must be reviewed by a certified public accountant whom the lender deems acceptable.
- Borrowers must submit one year's worth of monthly projections.
- The business's principals must guarantee the loan and support the guarantee with personal financial statements.
- Keyman life insurance may be required.
Gannon says even if you qualify for an asset-based loan, it might not be the best way to go. "Asset-based loans are more expensive than bank lines of credit and often much more intrusive on the borrower," he warns.
For instance, he says, if you have a good guarantee, are profitable and need to borrow, say, $500,000 for 60 days twice a year, you should go to a commercial bank. "That's the cheapest, easiest way to go," Gannon says.
Similarly, if you have a good guarantee and need a line of credit to support inventory and receivables that can be paid back within one year, there's a good chance a bank will take a security interest in your inventory and receivables and offer a line of credit or a revolving line of credit. "This also will be cheaper than a traditional asset-based loan," says Gannon.
But, he says, "If your guarantee is not that strong, you're not that profitable, your business is undercapitalized, you need working capital, and there's no way you can pay off a line of credit for perhaps two or three years, you present a problem for most banks even if your business is a good one." In these instances, he says, a bank will often refer you to a finance company offering asset-based loans--this may be your only salvation.