LOAN WORKSHEET #1 – ASSET BASED LENDING

Nrf14wk01 1 Texas Department of Banking (6/00)

Asset Base Lending (ABL) is a specialized loan product that is fully secured by collateral such as

inventory, accounts receivable, equipment or other assets of a company. These loans are structured

to provide a flexible source of working capital as borrowers may be highly leveraged, operate in a

highly volatile or seasonal industry, or may be experiencing rapid growth. ABL is also used by

healthy companies seeking greater flexibility in executing operating plans.

The primary source of repayment for revolving ABL credits is the conversion of the collateral to

cash over the company’s business cycle. Loan advances are limited to a percentage of eligible

collateral (the “borrowing base”). Strong controls and close monitoring are essential features of

ABL. ABL lenders may also provide term financing for borrowers requiring longer-term capital

or funding needs.

The primary risks associated with ABL are credit, operational, compliance, strategic, and

reputation. Price and liquidity risks may also be applicable to the extent the bank syndicates or

sells ABL loans.

Evaluate Comments

_____ 1. Does written policy contain the

following criteria pertinent to

asset-based lending?

A. Maximum credit limits

• per industry:

• per products:

• per borrower:

B. Maximum advance rates by

product or industry.

C. A lower advance rate or

exclusion for unfinished

inventory.

D. Minimum requirements for

verification of collateral.

E. An annual audit of the

borrower.

LOAN WORKSHEET #1 – ASSET BASED LENDING (continued)

Nrf14wk01 2 Texas Department of Banking (6/00)

Evaluate Comments

F. A clean-up period for seasonal

borrowers.

G. Periodic receipt of:

•

Borrowing base reports.

• Aged list of Accounts

Receivable.

• Detailed inventory list.

• Financial statements.

• Third party inventory and

accounts audit (an audit by

bank personnel is

acceptable where the audit

function is separate from

lending function).

• Letter loan

agreement/demand note.

_____ 2. In its analysis of the credit, has the

bank:

LOAN WORKSHEET #1 – ASSET BASED LENDING (continued)

Nrf14wk01 3 Texas Department of Banking (6/00)

Evaluate Comments

A. Determined the level of

customer credits arising from

disputes and returns?

(Inventory is sold and becomes

an account receivable.

Occasionally, the customer is

dissatisfied with the product

and returns it. The returned

item becomes a customer

credit. The percentage of

returns is sometimes referred to

as “dilution.” A company

which experiences a significant

volume of dilution may be

overstating the amount of sales

and accounts receivable in its

financial statements.)

• Are they of sufficient

volume to cause concern?

B. Evaluated concentrations in

accounts and the financial

strength of the largest

accounts?

• Does the volume of

concentrations result in

transferring credit risk to

the large accounts?

• If so, is there sufficient

information to analyze the

credit-worthiness of the

account customer (i.e. a

Dunn & Bradstreet report)?

LOAN WORKSHEET #1 – ASSET BASED LENDING (continued)

Nrf14wk01 4 Texas Department of Banking (6/00)

Evaluate Comments

_____ 3. Evaluate control of collateral

proceeds.

A. Does the bank utilize a lockbox

arrangement or some other

form of control to protect

collateral margins and ensure

performance?

B. Are lockbox accounts

periodically reviewed to

evaluate the extent of credits

arising from customer disputes?

C. Is there evidence that invoices

are paid out of chronological

order?

_____ 4. Perform credit analysis.

A. Spread interim and last 3-year

end statements.

B. Analyze trends in significant

ratios.

• Current ratio.

• Quick ratio.

• Inventory turn - days.

• Accounts Receivable turn -

days.

• Accounts Payable turn -

days.

LOAN WORKSHEET #1 – ASSET BASED LENDING (continued)

Nrf14wk01 5 Texas Department of Banking (6/00)

Evaluate Comments

• Interest coverage.

C. Analyze sources and uses and

changes in financial position.

D. Analyze line utilization.

• Review draw and payment

history.

• Is there evidence to indicate

bank review of borrowing

base and financial

information prior to funding

draw requests?

• Compare line utilization to

ratio analysis and changes

in financial position.

E. Determine the type of credit

facility.

• Temporary or seasonal lines

should be cleaned up

annually.

• Permanent (“evergreen”)

lines should be amortized

based upon earnings before

interest, taxes, depreciation,

and amortization.