Way back in 1965 the retailer K-Mart introduced what turned out to be one of the most notable merchandising tactics of the 20th century – The Blue Light Special. The concept was brilliant in its simplicity – turn on a blue light for a designated period of time and offer a deeply discounted sale price on a particular item while the light was flashing. The excitement generated among shoppers was a huge hit – and a good deal on that item was enjoyed by them all.
When done well, asset based financing is a “Blue Light Special” for growing companies.
Although asset based financing is often compared to bank lending, in most cases it should not be. The truth is that non-bank asset based financing is often the majority of cash capital in the company – and in most cases, a consistent track record of profitability is absent. In short, the company is not able to get the capital it needs from a convention bank. And when bank capital is not available, asset based financing offers entrepreneurs a highly attractive capital alternative (Also see Compared To What? post dated 02.23.12).
1. It’s much cheaper than equity.
In any growing company the value of the equity is dear – and rapidly increasing. Selling equity today will always be far more expensive than selling it in the future when the company is even more valuable.
While asset based financing has a higher fixed cost component (as compared to conventional bank financing), it does not include a stake in the company – and therefore does not mean management participation and control rights. Even setting aside the intangible “costs” of giving up some control to an investor, the cost of asset based financing is far cheaper than selling equity at a discount to its future value…
2. It’s available when the Blue Light is flashing.
Whether the company is newer or has recently experienced a bump in the road or simply has excellent near term growth opportunities, asset based financing is available when the proverbial Blue Light is flashing (i.e. when the company needs capital). And it is typically available in short order. When a company is experiencing a special circumstance, it needs capital – then and there. But . . .
3. It should leave when the Blue Light stops flashing.
When done right – like we do at Fundamental – asset based financing should be willing to leave when it is no longer the company’s best option. While it is true that most asset based financing providers seek some type of longer term commitment, we at Fundamental think this is a mistake. Therefore, we don’t require long term commitments. When our capital is no longer needed, we are happy to settle up and be on our way. No lingering obligations. No shareholder issues to resolve. No external oversight of management / ownership.
Equity of course, has a valuable role in the world, but like all forms of capital it’s role is a discrete one – and most often comes at a high cost in terms of both price and governance – costs that are typically (at least hopefully) commensurate with the risks. But if capital can be sourced less expensively and more flexibly – that is by definition a better deal for entrepreneurs. Better deals for owners are the business of good asset based financing firms – and the mantra of Fundamental Financial.