Lien on Me

CFOs eager to fill financing and liquidity gaps are turning to receivables for leverage.

When Belgium-based InBev bought U.S. beer king Anheuser-Busch in July 2008, payment flows to its suppliers dried up. One such supplier, Performance Cos., which prints point-of-purchase displays, received a notice from the beermaker saying that invoices would now be paid on a net-120 basis.

That kind of hit to cash flow can cripple companies, but Performance CEO John White took the news in stride. That’s because Performance has an asset-backed line of credit secured by its receivables from lender First Capital. While Anheuser-Busch InBev’s new payable policy might cause Performance to raise its prices, the company could still get 85% to 90% of the cash owed by Anheuser-Busch InBev within a week after invoice. “Assuming you have a good relationship with the asset-based lender, and the customer is creditworthy, it works,” White says.

Stretched by customers, rejected by banks, and pressured to grow sales again, finance chiefs are finding receivables-based financing a stable source of fast funds. Factors provided $140 billion in financing in 2009, showing slight growth over 2008. Asset-based lending (ABL) volume is typically three to four times larger, and in the fourth quarter of 2009 total outstanding loans increased 1.25%, says the Commercial Finance Association.

“An asset-based [instrument] generally has more reliability than a discretionary line of credit,” says John Kiefer, president of First Capital. “And if a company has a favorable uptick in activity during the year, or needs more cash because of an unanticipated problem, asset-based lenders will review [the facility] more often.”

That said, receivables-based financing, which encompasses asset-based loans, factoring (in which a company actually sells its invoices), and related credit mechanisms, is no panacea. Pledging receivables and getting advances against them can cost 30% to 40% more than an unsecured bank line, for example. In addition, “the CFO enters a different world,” one that often entails more-rigorous reporting on accounts receivable and collections while providing less flexibility in negotiating terms with customers, explains Guy Guinn, a partner at Squire Sanders Dempsey. And, in some cases, the lender comes to have an iron grip on the company’s cash flows. “It can [result in] a big loss of self-esteem and independence,” Guinn says.

Are You Eligible?

In general, companies turn to receivables financing when a bank won’t grant them unsecured credit. But that doesn’t mean this approach is the province only of distressed firms. Performance’s White, for example, says bankers get nervous when they see the debt on his books, which he incurs to buy expensive printing equipment. Other firms may require a larger credit line than banks are offering postrecession, or they may not want bank covenants hanging over their heads. Credit-loss protection is another motivation.

Of the various forms of receivables-based financing, asset-based loans are the toughest to qualify for and maintain, because the lender still underwrites the borrower and sets covenants like minimum tangible net worth. “We sit just below the banks when it comes to effacement of credit risk, and we are turning down a lot of deals,” says Laurence Kaplan, executive vice president of Gerber Finance, an asset-based lender.

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