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Sweet marketing music

Tanner Montague came to town from Seattle having never owned his own music venue before. He’s a musician himself, so he has a pretty good sense of good music, but he also wandered into a crowded music scene filled with concert venues large and small.But the owner of Green Room thinks he found a void in the market. It’s lacking, he says, in places serving between 200 and 500 people, a sweet spot he thinks could be a draw for both some national acts not quite big enough yet for arena gigs and local acts looking for a launching pad.“I felt that size would do well in the city to offer more options,” he says. “My goal was to A, bring another option for national acts but then, B, have a great spot for local bands to start.”Right or wrong, something seems to be working, he says. He’s got a full calendar of concerts booked out several months. How did he, as a newcomer to the market in an industry filled with competition, get the attention of the local concertgoer?

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by Chuck Mueller
November 2002

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Asset-based loans tap value of firm’s inventory, AR

ANY SKILLED BUILDER has more than one tool in the toolbox. As the architect and builder of your company”s future, you too should employ a variety of tools to finance your organization”s growth.

In addition to traditional loans and lines of credit, many savvy company owners are adding asset-based lending to their financial toolboxes. An asset-based loan is a revolving line of credit, based on the receivables or the inventory of a business. Asset-based lending can enhance the cash flow and increase the liquidity of a small or medium-sized business.

While most loans are extended based on the underlying value of an asset, an asset-based loan is a self-liquidating loan because it is based on the business cycle. In other words, the line increases when sales increase. Service, wholesale, distributor and manufacturing organizations in various markets are good candidates for asset-based loans.

Tekserve Inc., a computer parts and peripherals distributor, wanted to acquire another company that would add a new product line. Capital was needed for the acquisition and was originally arranged using an equity partner and issuing warrants. Warrants are higher-cost financing because equity is given up if the warrants are exercised. Asset-based lending allowed Tekserve to lower this cost by leveraging the assets being acquired and reducing the investment of the equity partner.

Shortly thereafter, another opportunity arose for Tekserve to make a large sale to a national retailer. Asset-based lending enabled TekServe to leverage this future income in order to purchase inventory to complete the sale.

Who can benefit? Many growth scenarios can benefit from asset-based lending, including startup ventures, new business opportunities for an existing entity and seasonal businesses.

If smoothing out cash flow will help you solve problems, an asset-based loan could be the solution. The best candidate for this type of loan is a company that can reliably convert assets to cash to repay the loan. This cycle can be repeat- ed as many times as necessary while you work through a period of extended growth or a difficult situation.

Seasonal businesses need to purchase inventory and cover overhead expenses during the remainder of the year in order to produce the goods for sale in a peak period. This creates a large need for cash during the slow months and a cash surplus during the peak revenue months, which can have a dramatic impact on the balance sheet ratios and make it difficult to obtain funding.

Creative financing

A bank that offers traditional financing, SBA financing and asset-based financing can often combine programs to lower costs and solve cash flow issues. A Minnesota- based company that sells Christmas decorations in more than 1,000 cities used an asset-based loan and a program offered by the Small Business Administration to help solve its working capital needs. The seasonality of the business provided insufficient accounts receivable and inventory levels to support the typical working capital arrangement during the off season. Unfortunately, the off season required the working capital to support the infrastructure that generated the sales closer to the holiday season.

Historically, the company generated sufficient cash flow at the end of the season to pay off the outstanding loan balance. Its president had 25 years of experience in the industry and demonstrated good management skills. In addition, the company had good internal operating and accounting systems to track its progress.

The SBA”s seasonal line of credit was recommended by the lender, which lowered the risk and provided a more favorable loan rate. Because the purchase orders were ultimately converted to a receivable, the loan in essence became an asset-based loan.

Costs and sources

When shopping for an asset-based loan, talk to your accountant or current banker. These professionals will help you work through the particulars of assetbased lending and how it could affect your overall financial picture. Keep in mind that asset-based loans are just one possible component of your company”s finances.

Be prepared to share information that will prove the reliability of your company”s underlying assets, including regular accounts receivable, accounts payable, inventory reports and monthly financial statements. The quality of receivables can be enhanced by having good systems in place to track them from day one, and by selling to companies with a sound credit history with your company or a credit history that can be verified through a pubic source such as Dun and Bradstreet.

Different lenders use different yardsticks for monitoring asset-based loans. Generally the more reliance on asset conversion or the probability that you will need to liquidate the asset for repayment, the greater the risk and need for monitoring.

Not surprisingly, a traditional loan requires much less monitoring resulting in lower service costs. Higher service costs for asset-based loans are reflected in the rate, which will be higher than the usual spread over prime. But rates are only part of the picture. There also could be various fees for audits, transfers and unused lines.

More companies calling themselves asset-based lenders have sprung up in the past several years. These lenders favor certain markets and their prices and services vary. It”s important to find the right fit. If you select a lender that favors larger deals even though you only require a small loan, you may pay a higher price.

When choosing your lender, be sure to factor in all transaction costs, including the cost to transfer funds to your account, origination fees, renewal fees and terms and fees for unused lines. Fees as well as rate must be considered in making the final decision.

And don”t forget to factor in the intangibles when you select a lender, such as knowledge and background of the lender. Services such as quick turnaround on requests, consistent personnel and assistance in spotting potential pitfalls could result in a better value than just the face rate of interest.

The bottom line

If your new venture or existing business is growing, consider an asset-based loan to tap the value of your company”s receivables or inventory. These underlying assets may enhance cash flow and provide the working capital you need to finance growth. And by using an assetbased line of credit you can avoid obtaining more equity capital, which could result in dilution of ownership or more personal debt.

Most importantly, seek an experienced asset-based lender that understands your industry and the critical link between additional financing, growth and success.

contact Chuck Mueller is senior vice president and chief credit officer at Fidelity Bank in Edina, a business bank that makes asset-based loans as well as most types of traditional business loans: 952.831.6600; chuck@fidelitybankmn. com; www.fidelitybankmn.com