Living on Borrowed Time

As banks tighten their purse strings, some companies are tapping an old standby — asset-based lending — to address their credit needs. ABL is backed by assets and is popular among cyclical businesses, such as garment manufacturers, retailers, and others that may not command a bank's best rates.

While some banks, including Wells Fargo and Bank of America, offer ABL, it's primarily the purview of about 300 non-bank lenders, such as CIT, Rosenthal & Rosenthal, and Platinum Funding. The appeal is simple: the interest rate may be higher than you'd prefer, but as soon as your receivables come in you apply them against the principal of the credit line, thus keeping your interest expense in check.

Kurt Carlson, CFO of GT Systems Inc., a staffing firm in Manhattan, says, "From a CFO's perspective, being able to minimize your borrowing costs by having only the bare minimum outstanding on your loan day in and day out is what makes the asset-based model attractive."

ABL volumes have been growing for several years and now approach the half-trillion dollar level (see chart). The Commercial Finance Association reported a 21.4 percent jump from 2005 to 2006, and expects to see a further increase when it releases its 2007 figures later this spring.

Some companies take advantage of another form of ABL known as factoring, in which the lender doesn't simply make a loan with the receivables as collateral but actually buys the receivables outright at a discount. "Factoring is a form of insurance," says Eyal Levy, president of Platinum Funding Group. "When you ship $2 million in merchandise to Wal-Mart, you don't want to check Wal-Mart's credit. You rely on the factor. If Wal-Mart goes under, the factor loses, not you."