Beyond Bank Asset-based Lending Approaches

Bank regulations have expanded over the years, making it harder for banks to be creative and remain relevant in the growth financing market. Larger banks have added layers of credit oversight and controls to the point where risk ratings and credit policy take precedent over the discretion of smart bankers.

Many banks want to believe they can help companies with growth financing, only to find that there is a large gap between their growth financing approach and the borrower’s need. For example, fast scaling companies often eschew investment in new production and rely on suppliers for inventory and expanded capacity. They strategically decide that this business model approach will yield faster growth and greater returns with respect to EBITDA.

A bank should be able to understand this capital allocation decision and can design a flexible loan structure predicated on cash flow as opposed to asset collateral. Yet often, banks resort to using unoriginal collateral-based lending approaches that place rigid requirements on companies with respect to growth models. Most banks prefer receivable and inventory-based lines of credit and will tolerate a term loan to the extent it is a minor part of the overall growth financing package.

Within this asset-based approach, there are a large number of eligibility requirements that shrink the borrowing base and available funding. Most fast-scaling companies need a growth financing amount far beyond a borrowing base amount. These companies are often investing in non-collateralizable areas such as new staffing, and R&D, ahead of any balance sheet growth. They need a bank to bridge the gap and allow them to invest creatively in business growth without the structures of an asset base.

Smaller commercial banks with an entrepreneurial bent can usually see beyond the assets and bring a relevant growth financing structure to the table. These banks usually fly beneath the radar screen of large banks and focus on understanding the capital need. They are able to appreciate the quality of the company and reconcile their credit policies to fit the needs of the borrower. Instead of pushing a non-value-added asset-based approach, they can deliver a high value cash flow loan structure. More banks would be well served to follow their lead.