Asset-Based Financing Helps Company Speed Its Growth
Bob Bregman, managing general partner of Wessco International, knows firsthand the value of finding the right kind of capital financing for a business primed for growth.
A decade ago, West Los Angeles-based Wessco did about $5.5 million in sales supplying guest-room amenities to cruise lines and upscale hotels, along with plates, saucers, tableware and other specialty items to major airlines.
Today the company does about $20 million in sales, and if you work the numbers, you see that they translate into a growth rate of about 15% per year for the period. Lots of business owners would kill for that kind of growth.
Bregman attributes Wessco’s success to his use of asset-based financing to raise working capital for the company, beginning in 1988. Like other business owners who use this type of financing, Bregman quickly saw that the technique, by speeding cash flow, frees up working capital to make rapid growth possible.
As explained in this space last week, asset-based financing works especially well for businesses with high-quality receivables and inventories--wholesalers and distributors, for example. Manufacturers and a variety of other businesses, including service companies such as temp agencies, also profit from this kind of borrowing.
To a banker, an asset-based loan is a revolving line of credit secured by inventory and receivables. To the business owner, asset-based borrowing simply shortens the time it takes to turn inventory and accounts receivable into cash--which can then be used to buy more inventory and generate more receivables. You borrow against the value of these assets, paying interest only on what you borrow. If you default, your bank makes itself whole by seizing your inventory and receivables and selling them.
Bankers commonly offer asset-based loans at prime or prime plus 1 or 2 points--so this kind of capital counts as cheap money.
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What’s more, they make asset-based financing available even to companies showing thin capital bases and some debt already in place. Despite the limitations inherent in such a capital position, asset-based financing allows many a cash-strapped business to make money by turning its inventory over very rapidly.
Wessco does business with such major air carriers as American, United, Delta, Alaska, America West and Swiss Air; with such cruise lines as Cunard, Carnival and Seabourn; and with such hotel chains as Intercontinental and Four Seasons. These customers give Wessco a book of very high-quality receivables, and the mechanics of their dealings make asset-based financing not just a good thing, but a necessity.
The company buys 70% of its supplies in Asia, mostly from manufacturers in China. For some of these suppliers Wessco guarantees payment with letters of credit; for some it pays via telex transfer. Small suppliers like the latter because telex transfers avoid the cost, delay and bother of letters of credit; these suppliers offer Wessco good terms to secure such payment.
Whatever the method, Wessco pays its suppliers long before it gets money from its own customers in the United States. In fact, five months may pass before Wessco receives payment for the goods it buys in China, Bregman says.
“Let’s say we get an order from American Airlines for porcelain for a whole year,” Bregman says. “They tell us they will buy 1 million plates at $1 apiece, and they want us to make them available on a scheduled basis--the first shipment 120 days out, the next 30 days after that, and so on.
“I commit for the delivery, and I tell my supplier in China that I want 250,000 plates on a boat leaving Hong Kong three months from now and sitting in Dallas about a month after that.
“I have to finance the purchase upfront to get the best possible terms from my suppliers. I get the shipment after four months, and American Airlines doesn’t pay me until the end of the fifth month.”
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Put another way, when it comes to timing, income and outgo don’t match for Wessco. Bregman can’t wait for his inventory and receivables to turn into cash in order to pay his suppliers. He needs working capital in the form of asset-based financing so he can buy more inventory and generate more receivables.
Bregman gets his working capital from Comerica Bank of California. Bregman’s banker, Thomas R. Kelly, a Comerica vice president, says asset-based financing may allow a business to increase its inventory turnover from six times a year to seven or eight times, multiplying profits in the meantime.
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To set up such a loan, Kelly says, banks want to see extensive financial data covering not only the business, but its owner as well. They also want monthly reports analyzing inventory and receivables--the paperwork downside to asset-based financing.
Bregman doesn’t see this as a burden, however, because his accounting software generates the reports automatically. In any case, the benefits of asset-based financing far outweigh the paperwork downside, he says.
“Asset-based financing makes life easier,” Bregman says. “We perform, obviously; Comerica doesn’t do this for us because it likes us. We only borrow what we need, and we pay a highly competitive rate of interest.
“From time to time we may get a big contract and go off our percentages for a couple of months while we absorb the new business.
“But I always know what I need to do to be in position to borrow the funds we need.
“I guess the most important lesson from our experience in using this type of financing is that it gives us peace of mind. We know that if we perform, the bank is with us. Things are under control. Asset-based financing helps cash flow--and it helps us grow.”
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Freelance writer Juan Hovey can be reached at (805) 492-7909 or by e-mail at jhovey@compuserve.com
