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Money Talk: Financing and Refinancing, Part 2: Asset-based Lending

The recession may have tightened lender requirements for printers, but as we noted in Part 1 of this article, excellent loan products continue to be available through reputable lenders. One such resource is Hennessey Capital, whose product line we recently discussed with senior vice president and business development officer, Jeff Wright.

Unlike a bank, Hennessey Capital is an asset-based lender that provides a workable line of credit secured by receivables and inventory. An asset-based loan is a bridge, intended to get the borrower back to a traditional bank at better pricing, rather than result in liquidation. When sales are down and the owner needs a way to keep the business going until it can become profitable again, asset-based lending buys time and keeps open the possibility of future bank financing.

Whereas bank loans focus on cash flow, profitability, and strong balance sheets, Hennessey looks at the strength of the collateral value and potential for repayment out of the loan itself. Their typical clients are often referred to them by banks, CPAs, attorneys, brokers, consultants, or other customers. Clients are generally:

  • Small businesses that cannot obtain traditional bank financing (manufacturers, distributors, and service companies with working capital needs under $3 million)
  • Startup companies with limited operating history or whose principals have poor credit scores.
  • Bank customers who have acquired large contracts, but find their banks unwilling to advance any more funds. Sometimes the bank will subordinate a debtor to Hennessey and keep the rest of the relationship, with Hennessey financing just one piece of the customer’s business.

A summary of Hennessey’s current rates and loan process is as follows:

Hennessey Capital: Highlights on Asset-Based Loans

Advance Rates

Up to 85% of eligible receivables; 50% on raw materials, finished goods, inventory. More aggressive rates possible with additional supporting collateral (real estate, equipment, personal assets). Exclusions: Work in process, receivables over 90 days, obsolete inventory, contra accounts, fixed assets, etc.

Personal guarantee

Required. Limited guarantee acceptable with strong credit and other supporting collateral. Repayment sought from loan rather than personal guarantee.

Deal Closure

3-4 weeks for asset-based loans

Pricing Ranges

10% to 15% on smaller deals

Duration

6-18 months for most clients

Costs to Consider

Closing fees (1% to 2% of the facility amount)

 

Exit fees (1% to 2% of the facility amount if the loan is refinanced with another lender; May be waived when client returns to any referring bank)

 

Possible unused line fees based on the unused portion of the line of credit

How It Works

All of Hennessey’s accounts operate on a lock-box basis. The borrower notifies its account debtors to remit to a lock box controlled by Hennessey for the customer’s benefit. Collections go into the lock box, and Hennessey sweeps it to pay down the borrower’s line of credit. Customers borrow back via a borrowing-based certificate (a running receivable loan balance). Upon review, funds are advanced into the customer’s operating account to cover cash needs.

Although the type of financing that Hennessey offers typically is more expensive than bank financing, it does provide immediate availability of working capital. This, in turn, lets the borrower pursue new opportunities to grow the business and cover its working capital needs when cash is tight.

Asset-based lending is not for everyone. For example, if a company’s margins are under 10 percent, the cost of borrowing may eat away at profitability. But when the top line needs to be fixed, asset-based lending can be the answer that keeps a tough job from becoming even tougher.

Stuart Margolis is a partner in MargolisBecker, which has long been recognized as the financial expert for the printing and allied graphic communications industry. It compiles the annual Printing Industries of America Ratios, the industry’s premier financial benchmarking tool. www.margolisbecker.com

Tom Williams is part of the team at New Direction Partners LLC, which has guided more than 200 printing company owners through the sales and merger process. www.newdirectionpartners.com

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