Better Banking: Bringing Asset-Based Lending and Merchant Credit Card Proceeds Together
Jeff Brown-July 18, 2019 Practically all commercial banking financial institutions (FI) engage in some form of asset-based lending. These loans, which take the form of revolving lines of credit or term loans, are secured by the borrower’s assets (as the name implies). How much credit a borrower can access is primarily determined by the quality and value of the collateral, which can range from accounts receivables and inventory to equipment and real estate.
The purpose of these loans range from working capital augmentation, acquisition, and recapitalization to financing growth through marketing spends, and much more. Repayment is typically looked at as cash flow from operations through collection of accounts receivable and conversion of inventory to cash through increased sales.
Often these loans and/or lines of credit are governed by some type of formula whereby the most collectable accounts receivable and marketable inventory is used to calculate the amount a FI is willing to advance to the borrower. For instance, the formula might be similar to:
“The FI will advance 80% of accounts receivable less than 60 days old and 20% of inventory less than 90 days old not to exceed $100,000.”
The benefits of these types of loan/lines of credit for both FI and customer are:
· Increase your borrowing power, especially for companies with less predictable earnings and cash flow
· Enhance discipline and efficiency around accounts receivables and production for more borrowing capacity
· Reduce financial covenants, including restrictions around the level of debt to enterprise value or cash flow, and net worth-focused covenants
· Potentially gain more time to address financial difficulties due to built-in collateral protection
As you consider the collateralization of these loans and lines of credit, merchant credit card deposits that are deposited in your bank each day are often overlooked. More and more merchants are accepting business-to-business payments via credit card. Today, the conversion of their accounts receivable is often in the form of a credit card payment and not a check. These payments are done for convenience, your client’s customers often demand the reward perks that go with B2B charges, or your clients have realized that they can often get paid faster with less bad debt expense by accepting credit cards for payment. Surcharges have also made it more attractive for B2B merchants to accept credit cards more than ever before.
Due to the highly competitive nature of the payments ecosystem, most merchant credit card processing relationships reside with third parties in today’s marketplace. As a result, banks have often lost the merchant relationship to payment specialists in the industry. Those third parties often control a very large portion of your bank’s asset based-lending collateral. The merchant credit card deposits are often being deposited at an FI other than yours, thus they are out of your immediate control or visibility.
As your FI is establishing its lending policies it should considering making it a condition of approval for all loans secured by accounts receivables and inventory that your bank process the credit card transactions for your customers. A policy of matching or reducing your client’s payment processing costs can be established so that your client knows they are receiving excellent service and value, your FI benefits by residual income, and your asset-based lending is better secured by having all of your customer’s deposits residing inside your FI. Why not have complete visibility of your customer’s cash flow via checks deposited, incoming wires, ACH and now credit card deposits? You’ll be able to see increased risks based on the health of the business, as well as opportunities to do more for your clients as they strengthen.
Contact our team at UMS Banking to learn how to implement this plan, reduce your lending risks, and better serve your customers today.