Today’s lending landscape includes many more options for borrowers than ever before. With the rise of crowd funding, peer-to-peer lending and other alternative forms of financing, a business has never had more options to fund their day-to-day working capital needs. The fragmented nature of this lending environment has given rise to the need to develop a niche. Whether it’s a unique product or a new way to approach a problem, a lender needs to find a way to stand out and provide a different product or service.
The specialization of lending has given rise to many nontraditional and innovative forms of financing. And though bank lending has improved over time, many opportunities still do not meet the regulatory and internal requirements of banks, leaving existing and prospective clients out in the cold.
Inventory financing — enabling a business to borrow against its inventory — is increasingly becoming a valuable tool to find enhanced cash-flow. Traditional lenders may want access to such a product, which provides a complementary component to the financing solution, especially if the borrower is engaged in a seasonal or inventory-heavy business. Specialty lenders with expertise in this form of financing are quickly being factored in as an essential asset to the final package.
Typical scenarios require a high inventory loan relative to the receivables outstanding, or retail inventory formula. The deal below is a real-world example of how two specialty lenders joined forces to achieve the most desirable outcome.
The transaction, funded in early April, involved a South Florida-based automotive parts company. The company, in a bank workout department for a number of years, had been searching for the right lender to take out the bank’s position and inject additional working capital into the business. Due to the nature of the business, the collateral position with the bank and a number of other factors, the client had been “left at the altar” a number of times. Numerous lenders were not able to get comfortable with the high volume of inventory relative to receivables, the large amount of inventory “in transit,” the company’s other ventures and the size of the investment needed to take out the bank position — a much higher figure than what many lenders are willing to make against various assets.
Instead of seeing a problem with the collateral or viewing the inventory ratio to receivables as a negative, we saw an opportunity to help a local business and gain new client. Independently, the company sought the assistance of a factor to provide a receivables factoring facility — a necessary component of the transaction. With a relationship between Crossroads and the factor stretching for a number of years, it seemed like a perfect match for a transaction that needed creativity and aggressive advances from both lenders in order to take out the bank’s positon.
The specifics of the deal were as follows: The company generates approximately $30 million in revenue annually, and at the time of initial due diligence, the company maintained $3.9 million in inventory, $2 million in receivables and the bank was owed approximately $4 million. The traditional asset-based lending model was difficult to obtain due to the sometimes 2:1 ratio of inventory to receivables. To many who viewed the transaction, it seemed as if the bank was in an overfunded position.
After an initial credit review, Crossroads provided the company with a proposal for an inventory revolving credit facility that had an advance rate of 50% of cost, or 75% of Net Orderly Liquidation Value (NOLV) (whichever is less), and included eligibility for inventory in-transit — a big hurdle for the company that many other lenders were not able to get comfortable with. The factor provided a receivable factoring facility at 90% of eligible accounts receivable outstanding — a number higher than most other lenders were willing to advance against the receivables.