Robert Trojan believes that asset-based lending is misunderstood and he is on a mission to change that view.
Trojan is the chief executive at the Commercial Finance Association, a New York-based trade group that represents asset-based lenders and whose members include some of the nation's largest banks. Though asset-based loans have been around for decades, Trojan says they are not as widely used as they could be because many companies don't recognize that they can borrow against their inventory or receivables, rather than more traditional collateral, such as real estate.
Asset-based loans also can confound examiners, who are used to judging borrowers' ability to repay by cash flow or income statements, not by assessing what's sitting in the warehouse.
Asset-based lending "might be counterintuitive to the way they look at credit quality," says Trojan.
To help change that mindset, the Commercial Finance Association is teaming up with its European counterpart, the International Factors Group, on a global campaign that aims to raise awareness about asset-based lending and the role it can play in providing capital to small and midsize businesses.
Through their strategic alliance, announced Monday, the groups will focus on three areas: educating companies — particularly those in developing countries — about asset-based lending; adopting more streamlined transaction laws around the world; and working with regulators to establish more consistent capital guidelines.
"As the economy becomes more globalized, it is critical that trade groups such as ours combine forces to work together to promote our industry," Erik Timmermans, the secretary general of the Brussels-based International Factors Group, said in a news release.
In an interview, Trojan said that promoting asset-based lending in the developing world is a key component of the partnership. Last year his group sent some of its members to China host a symposium for both lenders and borrowers on how to do asset-based lending and he says the groups intend to do more of that type of outreach.
"In Latin America [and] Asia, companies have a strong need for capital and they don't always know that asset-based lending" is an option, Trojan says.
In the developed world companies are more aware of asset-based lending, and more and more U.S.-based banks have been adding asset-based lending units in an effort to reach more potential borrowers. (Many companies that use asset-based loans do not qualify for more conventional commercial-and-industrial loans.) Signature Bank in New York (SBNY) recently started a division by hiring a team of asset-based lenders away from rival Capital One Financial (COF). TCF Financial in Wayzata, Minn., tapped the head of a nonbank asset-based lender to run its new unit.
Still, though interest among banks is rising, many potential borrowers have been reluctant to take on asset-based loans due to the weak economy. According to the Commercial Finance Association, U.S. companies used only 41.5% of available asset-based lines of credit in 2012, more than the 36% they tapped in 2009 but well below pre-crisis highs of above 50%.
Trojan says the "uneven" allocation of capital against asset-based loans could be another reason why demand remains sluggish.
There is no set amount banks must set aside for potential defaults of asset-based loans, but Trojan says banks are tending to "over-allocate" these days in response to regulators' concerns that loans could sour — even though default rates on asset-based loans are historically well below 1%.
"We believe, at times, the regulators are asking for more capital and, correspondingly, our members are holding more capital against asset-based loans," than they believe is necessary, he says.
If the two sides could find more common ground, he adds, "there will be more capital available to grow the economy."