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NEW YORK-Home goods companies that are thinking about financing their growth need to know that not all loans are created equal, and not all lenders have the same criteria when it comes to structuring a loan. Borrowers need to be picky.

But the most important consideration is whether to take out an asset-based loan or a cash-flow facility, said one lender.

Stephen Leavenworth, senior vice president and director of business development at CIT Commercial Services, discussed with HFN the benefits of asset-based loans. Although some would disagree, he said they offer greater accessibility and flexibility for the borrower.

HFN: What are the differences between an asset-based facility and a cash-flow loan?

Leavenworth: From a borrower's perspective, there are three things you need to think about: cost of the credit facility, access to different credit instruments and flexibility, which is what you can do within that lending relationship. You have to ask if there are a lot of covenants or other restrictions that might reduce your flexibility.

When I look at the difference between cash-flow lending and asset-based lending, I believe that it primarily starts as an access issue. Many companies cannot access the cash-flow market. In general, the mainstream cash-flow market tends to assume a baseline level of earnings before interest, taxes, depreciation and amortization in the range of $25 million to $40 million and then builds in a multiple to determine the total credit facility size. For example, if you have $25 million in EBITDA, and the credit markets are allowing you to borrow three times your cash flow, you can get a $75 million credit facility. Shopping around will get you different rate quotes, terms (three or five years) or covenants. That is not to say that no one will give you a cash-flow facility if you have less than $25 million in EBITDA. There are plenty of players who would lend on less EBITDA, they are just a little harder to find.

The cash-flow market tends to work better with companies that have larger EBITDAs. They also tend to be larger lending facilities. And the cash-flow lending market also tends to act like any financial market, complete with all of the supply-and-demand features, and reactions to news events.

With asset-based lending, I like to equate it to relationships. It is not subject to some of the supply-and-demand market conditions associated with cash-flow facilities. If you are an asset-based lender, you are concerned with the balance sheet, and the quality of the balance sheet, first. If you're a cash-flow lender, you're concerned with the earnings of the company first, with the balance sheet a distant second.

HFN: What are some of the disadvantages of a cash-flow loan?

Leavenworth: The disadvantages are that access to cash-flow loans tends to be driven by the credit market, and there are a lot of variables in that market. Access to funding depends on a lot of things.

It depends on what the equity sponsor markets are doing. It depends on the multiples of cash flow that the market is willing to accept. It could depend on what the high-yield market is doing. It could very well depend on the regulatory environment at the banks. And it could depend on the overall credit climate, the appetites of larger lending institutions and how much they want to lend. As a result, the cash-flow market experiences more drastic changes.

HFN: When you do an asset-based facility, you're also looking at long-term debt?

Leavenworth: When you do an asset-based loan, you're really looking closely at the asset classes and trying to match the funding requirement with the asset life. For example, an asset-based line of credit to support working capital is based on the shortest- lived assets on the balance sheet: accounts receivable and inventory. And the loan would have the shortest duration, say one to three years. However, for a longer-term asset, like equipment, the loan term would mirror what is called the useful life of the asset. So if you are lending against equipment with a useful life of three, five or 10 years, you could get a loan over the same three-, five- or 10-year periods.

HFN: So what are some of the other types of assets a lender considers when structuring an asset-based loan?

Leavenworth: What I'm looking at are receivables, inventory, property, plant and equipment (and real estate) as well as some intangibles, such as intellectual property, trademarks and royalty streams. A cash-flow lender also looks at these things, too, but they may not be as concerned as an asset-based lender as to what's actually in those asset classes. As an asset-based lender, I am concerned with the quality of the assets on the balance sheet, not necessarily the earnings that the assets generate. I am also concerned with the technology used by the company and its ability to tell me where assets are physically located at any time.
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Title Annotation:Stephen Leavenworth talks about types of financing
Author:Zaczkiewicz, Arthur
Publication:HFN The Weekly Newspaper for the Home Furnishing Network
Article Type:Interview
Date:Jul 14, 2003

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