Amid reports of record bank profits, many analysts are claiming that the "credit crunch" has ended.
Banks, with improved profitability and stronger balance sheets, are increasing their traditional lending.
They also are looking at asset-based lending as a way to complement their existing finance offerings and expand their base of middle market customers, who make up the majority of asset-based borrowers.
However, creating or rebuilding an asset-based lending function is not simply a matter of restructuring an organization or refocusing management's attention on a previously overlooked area.
In fact, a successful asset-based lending operation requires a significant investment in four areas:
* Experienced people for originating, underwriting, and monitoring the loans.
* Internal systems and technology for the complex task of monitoring and analyzing borrowers' financial and collateral performance.
* The time of senior management that might be more productively used in other areas of the bank.
* Establishing a separate organization within the bank with a different culture, or lending philosophy.
Understandably, these investments also require a commitment by the institution's management to dedicate critical financial resources to this area.
Clearly, not every bank has the resources, professional talent, time, and skill to create an effective and profitable asset-based lending group.
There is an alternative, however, for banks who want to take advantage of asset based lending opportunities -- develop a participating relationship with an established asset-based lender.
Such an alliance can help a bank retain or strengthen a customer relationship by arranging for credit where traditional bank lending guidelines preclude extending it.
In such a case, both the bank and the customer benefit.
Homework to Do
What type of banks will benefit from theses alliances? For example, is their geographic presence local, regional or national? Is their lending orientation based on the same principles as yours? Do they have a particular industry specialization or do they fit the profile that meets your needs?
Once you've narrowed the possible partners to those who fit your lending parameters, do a lot of homework.
Ask a lot of questions. For example:
* What is the experience level of the lender's staff -- in origination, in underwriting and in servicing asset-based loans?
* Do they have the ability to appraise assets by using an in-house appraisal capability on a national basis?
* Is their write-off history at an acceptable level? Have they weathered the most recent economic downturn?
* Do they have a research department devoted to developing and maintaining an understanding of their customers' industries?
* What type and frequency of information will you as a participant receive in order to track the loan's performance?
* Do they have state-of-the art technology, such as local area networks and loan servicing systems, to effectively and efficiently monitor their portfolio and transmit and report information rapidly? After all, in this business, timing is often crucial.
* Do they have a rating system with high integrity that rates credit and collateral on each loan's performance?
Once you've narrowed the prospects through these questions, do some fieldwork.
Spend a day with the lender's loan servicing staff to see how they will handle your customer or prospect. Ask for a sample loan underwriting package with all supporting documents.
In effect, you want to determine how well they do their homework.
Also, meet and talk with the loan workout people -- they're the ones you'll have to rely on to get out of a loan in the unlikely event the borrower fails.
And finally, ask for references, both of current customers and of other banks with banks with whom they have participation relationships.
The more homework you do, the better the quality of your decision and choice of asset-based lending partner.
Establishing a strategic alliance with an asset-based lending specialist presents a "win-win" situation for a commercial bank and its customers.
The bank gains the ability to enhance its customer service portfolio without a significant expenditure of time, effort and financial resources.
Its customers benefit through the ability to achieve all their banking and finance needs from a single source.