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50 • JANUARY 2014 • WORLD FENCE NEWS Asset-based loans continued from page 48 don't qualify for a traditional bank loan or line of credit. To understand why, you need to understand the main differences between bank loans and ABL – their different structures and the different ways banks and assetbased lenders look at business lending. Cash flow vs. balance sheet lending Banks lend money based on cash flow, looking primarily at a business' income statement to determine if it can generate sufficient cash flow in the future to service the debt. In this way, banks lend primarily At Western Tube & Conduit customer satisfaction and quality are the first order of business. Our Fencepost and Fencerail production is ISO-9001:2008 certified - and our products are manufactured to meet all the applicable state, federal, industrial and regulatory specifications and requirements. While we regularly stock standardized products and sizes, we are happy to provide custom dimensions as well. All our Fence products are galvanized with high purity zinc. We use high frequency welding (ERW) to turn the highest quality strip steel into tubing, and then a continuous hot-galvanizing process to zinc-coat the products smoothly and evenly. A zinc-rich interior organic coating, a chromate conversion coating, and a clear exterior organic coating provide the complete finish package that gives them superior protection against the elements and long life as a result. Gal-Z serves customers looking for shaped Fence tubing as well as corrosion-protected mechanical tubing. It can be purchased in squares and in rectangles, and it provides excellent environmental durability while also fulfilling the need for strength and weldability. Be Sure To Visit Us At Booth No. 1151 based on what a business has done financially in the past, using this to gauge what it can realistically be expected to do in the future. It's what we call "looking in the rearview mirror." In contrast, commercial finance asset-based lenders look at a business' balance sheet and assets – primarily, its accounts receivable and inventory. They lend money based on the liquidity of the inventory and quality of the receivables, carefully evaluating the profile of the company's debtors and their respective concentration levels. ABL lenders will also look to the future to see what the potential impact is to accounts receivable from projected sales. We call this "looking out the windshield." An example helps illustrate the difference: Suppose ABC Company has just landed a $12 million contract that will pay out in equal installments over the next year, resulting in $1 million of revenue per month. It will take 12 months for the full contract amount to show up on the company's income statement and for a bank to recognize it as cash flow available to service debt. However, an asset-based lender would view this as receivables sitting on the balance sheet and consider lending against them, depending on the creditworthiness of the debtor company. In this scenario, a bank might lend on the margin generated from the contract. At a 10 percent margin, for example, a bank lending at 3x margin might loan the business $300,000. Because it looks at the trailing cash flow stream, an asset-based lender could potentially loan the business much more money – perhaps up to 80 percent of the receivables, or $800,000. The other main difference between bank loans and ABL is how banks and commercial finance assetbased lenders view the business' assets. Banks usually only lend to businesses that can pledge hard assets as collateral – mainly real estate and equipment – hence, banks are sometimes referred to as "dirt lenders." They prefer these assets because they are easier to control, monitor and identify. Commercial finance assetbased lenders, on the other hand, specialize in lending against assets with high velocity like inventory and accounts receivable. They are able to do so because they have the systems, knowledge, credit appetite and controls in place to monitor these assets. Apples and oranges As you can see, traditional bank lending and asset-based lending are continued on page 56