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It's About Preservation of Loan to Value
First of two parts
While they may not always be aware of it - or even want to admit it - community banks that make commercial loans probably have entered the wonderful world of asset-based lending somewhere along the line, says John Logan, retired director of asset-based lending at South Trust Bank, Birmingham, Ala.
Asset-based lending is the practice of making loans that use a company's assets such as receivables, inventory and machinery as collateral for the loan. In asset-based lending, the quality of the collateral becomes pre-eminent in determining the creditworthiness of the customer.
"Community banks make commercial loans, and included in that commercial loan bag are working capital lines secured by receivables and inventory," Logan says. "If a bank is making commercial loans - i.e. working capital loans secured by current assets - it is going to be in the asset-based lending business whether it wants to be or not... to one degree or another. And that has everything to do with the balance sheet and the overall solvency, liquidity and creditworthiness of their borrower."
Logan describes a scenario that often occurs when he teaches classes at the ABA National Commercial Lending School. (This year's school will be held May 14-20, at Southern Methodist University in Dallas.
For more information, call 1-800-BANKERS.)
He asks students, "Do you make asset-based loans?" and they always answer no. Then he asks, "Do you make working capital loans?" They answer yes. He tells them, "Well, you're in the asset-based business." They...