Selecting the right asset based financing company is one of the most important decisions you can make for your business. Your evaluation process must be designed to ensure you choose the best asset based lender to fit your tactical and strategic financing needs.
This article describes a short process to help you evaluate potential lenders. If you are not familiar with asset based lending, read this detailed explanation of how the solution works before reading this article.
Determine selection criteria
Your first step in the due diligence process is to create your criteria for lender selection and evaluation. The actual criteria depend on your industry and your requirements. However, the following list provides an idea of the criteria to consider when evaluating potential lenders. Note that this list is not all-inclusive and should be used only as a starting point.
1. Do they have experience in your industry?
Perhaps the most important question you can ask your prospective asset based lender is if they have experience in your industry. Generally, you get the best terms from companies that work in your industry, understand its risks, and know how to value the collateral properly. They usually make the best financing partners as well. Having industry experience allows them to structure the asset based facility to best match your needs.
2. Can they finance your specific asset mix?
The most common assets that lenders finance include accounts receivable, inventory, and equipment. Most lenders develop expertise evaluating certain types of assets and, therefore, have a preference for those assets. It is critical that you find a lender that is comfortable with your asset mix. This familiarity increases your odds of getting the the highest level of financing. Generally, a lender with experience in your industry is the most comfortable with your asset mix and can offer you the best terms.
3. How long have they been in business?
This question is self-explanatory. You want to work with an asset based finance company that has a track record and has been in business for some time. Consider companies with at least five years of experience.
4. How are they funded?
Bank based asset financing companies tend to be funded the same way banks are funded – with deposits and by selling certificates of deposit to institutional investors. Independent asset based lenders, on the other hand, are financed from multiple sources including lines of credit, private equity, and hedge funds.
The source of the funding is not as important as the diversity and stability of their financing lines. Perform some due diligence regarding this matter and determine if you are comfortable with their funding sources.
5. How much do they charge for their services?
Examine the lender’s fee structure to make sure it aligns with what you can afford. Ask about any ancillary fees as well, as they can sometimes be high.
6. What are their procedures regarding customer contact?
Lenders who finance accounts receivable often work with you to process client payments. This course of action often requires your clients to send payments to a special bank lockbox. Additionally, asset based lenders also contact clients from time to time to ensure that invoices are accurate. Inquire about these processes and ensure that you are comfortable with them.
7. Will an on-site audit be required?
Some asset based financing companies may request an onsite audit, especially if the financing line is above a certain threshold. You cannot do much about an onsite audit – it is a common industry practice.
Make sure you understand the cost of the audit and its impact on the underwriting process. As you might expect, the cost and impact of the audit on the underwriting process depend on the size of the facility, the types of assets being financed, the location of the assets, and the quality of the financial records.
Selecting the right lender
The most challenging part of the selection process is developing the initial lender evaluation criteria. Once this list has been developed, selecting the best asset based financing company is no different from selecting any other vendor.
Develop a list of prospective candidates through a variety of sources. Take them through your evaluation process until you can narrow your list to the top asset based lenders. At this point, it’s a matter of evaluating their proposals and choosing the best strategic partner for your company.
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