Companies that are looking for loans but need to use their inventory as collateral often find them hard to come by. Many lenders consider inventory financing risky, since they cannot keep tabs on inventory flow.
But that is less of a problem for UPS Capital, the banking subsidiary of United Parcel Service of America Inc. in Atlanta. It lends against inventory even to borrowers with the riskiest collateral of all: delicate material that needs to be shipped long distances at controlled temperatures.
For the first time, that expertise has translated into a major sale.
UPS client Haemacure Corp. of Montreal had a financing problem, said James L. Roberts, chief financial officer. The company makes fibrin sealant, an adhesive used in surgery in place of stitches. The product contains human plasma components and is highly perishable. It was approved for cardiac and neurosurgical procedures in 1998, the same year UPS Capital was founded.
It is shipped from a factory in Vienna to a warehouse in Fort Worth, Tex., where it is then sent out to hospitals nationwide.
UPS Capital came to Haemacures attention when Haemacure was looking for a new carrier to ship its product. (It had been using four carriers at once.) And what began as a transport agreement became a financial relationship.
This month UPS Capital gave Haemacure a $6 million revolving line of credit, with the product as its collateral. The loan is for five years, and can be renewed.
Haemacure has long had problems getting working capital loans using the sealant as collateral. Lenders are just nervous about it, Mr. Roberts said. The $6 million loan from UPS Capital is by far the biggest his company has ever obtained, he said.
But UPS is in a far better position than other lenders to make such loans, Mr. Roberts said, because it oversees the inventory from the manufacturer to the end user.
They have complete quality control.
Shipping the sealant requires particular care, said Charles G. Johnson, the senior vice president of UPS Capitals distribution finance division. We are lending against an inventory that has a perishable nature.
This is not something that every lender will do, he said, because the product has to be kept at an appropriate temperature, coupled with the fact that its in transit and could lose its value very quickly.
But the fact that UPS Capital can rely on another United Parcel subsidiary, Livingston Healthcare Services, to handle the entire shipping process makes it far easier to agree to such a loan, he said.
Another benefit for United Parcel, of course, is the money it makes transporting the materials. But monitoring the inventory is just as important, Mr. Johnson said.
The biggest concerns whenever we make an inventory loan is where the stuff is located if we ever had to get control of it, is it actually going to be there? That risk is completely removed, because the goods are completely in the control of the sister company.
Irene Moore, a spokeswoman for UPS Capital, said Haemacure is the first customer where all of the UPS supply-chain pieces of transportation, inventory-based lending, and other elements came together simultaneously.
We hope to replicate that model.
So far UPS Capital appears to have no real competition in inventory financing, because few lenders can provide all levels of the service in-house. FedEx Corp. can provide financing but has to go outside the company to so, according to Pam Roberson, a spokeswoman for the Memphis company.
We dont have a separate division of the company handling that sort of business activity, Ms. Roberson said. However, We are capable of providing that kind of service with a number of financial institutions if our customers expressed a desire to do that, she said.
And UPS Capital is certainly not going to bump into banking companies with the same capabilities. Banks arent going to get into the transportation business, said James L. Winchester, a transportation analyst for Lazard Freres & Co. Its not like they can hop on the railroad. It has already been constructed, and its owned by UPS.
UPS Capitals unique relationship to Haemacure, and potentially to other companies like it, can provide early signs that a customer may have trouble making good on the loan, said Peter V. Coleman, an equity analyst with Banc of America Securities.
A conventional financial institution will rely on financial statements, which are lagging indicators, or spot checks, which are not all that frequent, he said.
Further, Mr. Coleman said, Its not so much that theyre transporting it, theyre there at the warehouse knowing its there.
UPS Capitals way of getting into the lending business is not new, said Donald Broughton, an analyst for A.G. Edwards & Sons. GE Capital pursued many similar relationships in its early stages, when it sought out companies with which General Electric Corp. had a relationship, Mr. Broughton said.
And though UPS Capital is still young and its lending does not add substantially to the parents revenue, its ability to transport the inventory it is using as collateral is promising, Mr. Broughton said.
Is this strategically interesting? Could it mean a revolution in the way that inventory is financed? Absolutely.
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