New Ineligible Reserves – Wal-Mart and Others

Wal-Mart Ineligibles

The Wal-Mart / Amazon / Big-Box Picture

There is a storm brewing with Wal-Mart leading the charge to push vendors for lower prices and it started on July 1, 2015.   Wal-Mart, Amazon and others are pushing vendors to take deeper discounts and reduce prices, but with tactics that can affect your revolving loan / asset based lending collateral.  The Wal-Mart fees, stocking charges, advertising curtailments and more are typical of what is also happening with sales to Amazon and other Big-Box Stores (B-BS) retailers; there will be more and this blog is the taste of things to come in B-BS retail.  Shareholder earnings take a priority when the giants come to grips with performance and the little guy (your borrower) be damned.

New Stores and New Warehouses Stocked Cheaper

Wal-Mart is seeking to have vendors take a discount of perhaps 10% to stock new warehouses and new stores.  You might wonder why?

  • Because the holding period is longer until normal flow builds up
  • Because there is a higher cost to stock and open new stores and warehouses
  • Because Wal-Mart wants to compete with Amazon and someone needs to pay for that
  • Because they can

Handling Fees

Another new addition at Wal-Mart will be handling fees for the existing warehouses and the follow-up (not initial order) to stock the shelves at the warehouse.  Stocking fees are not new, they are just going to be more pervasive now.  Items like liquor and certain perishable goods will be exempt from this stocking fee.

Store Branded Products and Electronic Advertising are Growing

Wal-Mart Low Price smallWal-Mart is changing some of that co-op advertising that they have done because on-line e-tailing is growing and since Wal-Mart owns the web servers, there is little added cost to run Wal-Mart products right along other vendor’s products.  Perhaps more than a little competition with priority placement for Wal-Mart goods?  But there is a ton of money in that advertising cost and the strategies to reduce vendor advertising expenses and pass the savings to Wal-Mart include:

  • Having vendors cut their end-display, banners and display costs to pass that savings to Wal-Mart
  • Having the vendors stop preparing on-line marketing materials (artwork , Etc.) to reduce vendor costs
  • Having the vendors reduce their internal marketing efforts that push sales to Wal-Mart

So now we have a Giant telling the vendor how to sell their product and how to save costs on marketing while simultaneously pushing Wal-Mart products as featured items on-line and through other marketing materials.  Store brands vs. name brands and the store decides what gets top billing.

Discounts – Out with the Old, In with the New

Change or Same old...Prompt-pay discounts are nothing new and in some economies they go away and in others they are more prevalent.  Some of the normal Wal-Mart Terms were 1%/N20 and this of course helped vendors to pay for payroll and materials.  But the “new deal” is an additional 1% (2% total) and a stretch W A Y – W  A  Y – W   A   A    A   A   A   Y   Y   Y  — out to 90 days (ninety days in case you fell off your chair).  Not sure what the terms are if you don’t take the 90 days and 2% discount?

 

Slow Goods = Slow Pay

Fast or SlowGoods that turn slower than normal in the stores will be expected to take even longer pay period changes.  Goods that sit on the shelf for more than 60, 90, 120 days will be penalized with extended pay terms and many will still be subject to the discounts.

They Can Bank on It $$$$$

Wal- Mart is also extending their reach into the financing of these goods.  Vendors that lack the appropriate lines of credit can get their financing from Wal-Mart and the rates may be more favorable than some lending relationships from revolving lines of credit or factoring.

Warehouse Cost Savings to the Borrower?

If you are a manufacturer and Amazon or Wal-Mart of some other B-BS is your warehouse, that might actually be an OK deal.  Think about how much it costs to run a warehouse, finance or rent it, insure it, provide security, utilities, employees, forklifts, Etc. and this B-BC warehouse management case could be a good deal for some; it is not all bad in many cases to pay the fees if this saves the warehouse costs.

Let’s Add-Up The ABL Reserves

A Summary Please

Wal-Mart Fee GridAt this time it is not clear if the discounted terms fee or the stocking fee will be applied to the initial order (new stores or New Warehouse), time will tell soon enough.  Different vendors could have different terms than noted here and it will certainly vary from one B-BS to another.  This illustration of the 10% Initial order (new stores or new warehouses) and then ongoing fees is just one possible scenario.  Clearly you’ll need to investigate, document and then monitor the case for each Account Debtor and each of your Borrowers.

That Was Fun, More Numbers Please

This will stretch out your Borrowing Base loan and collateral days and that means more interest income to Lenders while possibly increasing ineligible risks if care is not extended to allow for the longer terms (see recommendations below).  Moving from 20 days to pay to 90 is a whopping 450% increase in outstanding days and it could push concentration limits to untested levels for some lenders.  Actual days could be more with normal paperwork processing, transit time, mail time, Etc.; although the 450%  (600% if you go to 120 days) difference would have the same 5-7 additional days (reality) in the case of 20 day or 90 day terms plus any additional processing time.

How will that affect your Borrowing Base?  It’s going to have more days of cash outstanding for sure and in many cases the concentration levels of Wal-Mart, Amazon, other B-BSs will double or triple if monthly shipments are the norm; expect temporary concentration issues on seasonal goods.

Cushion is Toast, Concentrations are Up!

chshion is toastAsset Based Lenders typically use a 90 day eligible base and with normal 30 day payment terms, the AR turns in 35-45 days in many cases.  Assume an average 42 days of AR turnover and the lender has 48 days (90 – 42 = 48 days) of “cushion” remaining in case of delays of payments within that 90 day limit.  That cushion in this example is 53% (48/90).  But add the Wal-Mart case with 90 or 120 day payment terms (longer on slower turning goods) and you can see that your ineligible cushion days are up in smoke while your concentration balance goes way up.

Other Lender Considerations

 The Bank of Wal-Mart (TBOW / Bank of Big-Box Stores = BOBBS)

The trade finance provided by Wal-Mart is both competition to existing lenders and a move into financing that has been coming for a long time.  We all know about the small branch office bank at our local grocery store and perhaps Wal-Mart and similar B-BC stores.  Consumer lending and one-stop banking could carry the TBOW / BOBBS brand in the future.  It’s easy to imagine financing your car or house with that convenience and you might also get a great rate.

It is a bit of a nightmare to imagine Wal-Mart or another B-BS double squeezing a Vendor that relies on Wal-Mart sales and has Wal-Mart financing for those goods.  The possible threats of reduced Wal-Mart purchases and financing offsets against money owed to the Vendor carry borderline ethical and legal undertones for squeeze-play tactics.  Any BOBBS in a work-out the vendor situation sounds like a new chapter in finance.  Regardless of how transparent this might be, the net cash back to the vendor (your Borrower) is going to be after the fees and interest.

Offsets?

Secured Lenders want a first position lien on all assets now and hereafter acquired through blanket liens.  The TBOW financed piece is a carve-out from secured loan collateral with Wal-Mart holding the inventory and payable and then TBOW getting the proceeds from sales to date and acting as recipient of the interest earned and fees owed.  With Wal-Mart paying TBOW (themselves), Lenders will need to remain diligent to catch such offsets and to carve out the collateral reserves needed for the discounts, fees and interest.

Ratios

Wal-Mart’s Current Ratio will take a trip to the other side because retail and on-line sales have instant cash turnover on the Asset Side and now the payables are going to mushroom into something new.  Like the original Dell model (7 day cash turn, 30 day payable turn), expect negative working capital ratios for Wal-Mart.  Your borrower on the other hand is going to get dinged for having growth in both receivables and the revolving loan, but your AR turnover numbers are going to take a hit where the B-BS retailers dominate while your liquidity and debt to equity ratios are going to change a bit too.

Some Recommendations

The following list will no-doubt be expanded in the months to come, but the basics should not be overlooked:

  1. Interview the Borrower and determine the extent of Wal-Mart and other B-BS terms in place.
  2. Get copies of the Purchase Orders and Contracts from all B-BS and Concentration accounts and read them in detail to determine the levels of invoices affected.  You might find no issues at all or you’ll be able to quantify the needs for loan monitoring of specific Account Debtors when special terms are found.
  3. Have the Borrower designate the 10% initial sales invoices with specific markings such as:
    • Credit Terms stated in the aging as Wal-Mart 10% Stocking Fee, Net 90 (WM10/N90)
    • Specific Invoice sequences used for invoices that include the initial stocking fees
    • Separate Wal-Mart Accounts for the Initial Orders (E.G., Wal-Mart Warehouse 999999 Initial Stocking)
    • Put the B-BS stores on a separate aging report, as if they were a division of the Borrower’s company.  Note that from an operations standpoint this might help the company to see the profit and costs of those B-BS sales in a more focused (divisional) light.
  4. Be smart about GAAP accounting and revenue recognition procedures.  Because the Borrower has full knowledge of the terms, they must book the reserves when the sale is made; this is a sure-thing discount, much like negotiated / contractual medical rates with Insurance Companies.  While B-BS accounting will be tracking their discounts earned against the gross invoice, the seller is your Borrower and they have a potentially large offset here.  These terms are not a normal 1/2% or 1% discount taken at the time of the cash receipt from some debtors that do take the discounts; rather, this is a sure thing and it should be reserved on your Borrower’s books as a discount to revenues.  They can fix it if the discount is not taken.
  5. TBOW / BOBB could file liens to help secure the notes and one would expect at a minimum the right to offset fees owed against payments due would be in the agreements.  Running a lien search on your Borrower is prudent.  Perhaps Wal-Mart and others will make this easier to determine after they are inundated with inquiries to make this easier.
  6. Run those Lien searches on ALL locations and ALL names that your Borrower has.
  7. Discuss filing Purchase Money Security Interest (PMSI) filings to see if that makes sense for your collateral coverage.  The time and effort to file on many customers (Account Debtors) is often a negative if you are not in the trade finance business, but here you are just filing on just Wal-Mart or other B-BS.  Expect push-back on any such filings, but they can’t expect silence on collateral lien filings methods allowed by law.
  8. Modify the Loan and Security Agreements to compensate for the change in business terms.  Due date aging reports or due date aging for extended term customers should be investigated.  This needs to be done now, we’re into July and reality is ticking away inside your new sales to Wal-Mart and possibly others.  It is going to affect all of your loans that have Wal-Mart / B-BS debtors.
  9. Download your agings to help find this stuff.  We’re #1 at this (www.finsoft.net).
  10. As noted in the opening paragraph to this Blog, you’ll be seeing this with Wal-Mart, Amazon and other B-BS retailers in the coming months.  Plan to deal with this now.
  11. No way to know how the OCC is going to look at this.  Portfolio concentration by major debtor across your portfolio has some risks with the likes of Wal-Mart, Lowes, Home Depot, Etc., but it has not been a significant concern with prior payment terms and turnover of AR into cash.  This will raise concentration levels to a much higher level and portfolio-wide concentration analysis or incremental risk rating downgrades and resulting reserves could become a regulatory requirement.  It might be poetically funny if some of the B-BS “lenders” (The BOBBS) are perceived as giant financiers worthy of OCC oversight, complete with special reserve requirements [just saying… It happened to CIT, GE Capital, Etc.].
  12. Recalculate your ratios for Liquidity and Debt to Equity, the AR is going to grow on the Asset side with loan growth on the Liability side.  You may need to adjust covenants due to a change in business practices that are not under the control of the Borrower.
  13. Watch interest coverage and debt payment coverage, you might see less of it.  Again, adjust covenants if needed due to a change in business practices that are not under the control of the Borrower.
  14. While Lenders will enjoy higher earnings on commercial loans from this change, the interest cost sensitivity for low equity and marginal income Borrowers could be a tipping point for some and sensitivity analysis for those at risk may be helpful in being proactive with covenant changes to avoid technical or [gulp] real defaults.
  15. Have some feedback on this; something to correct, change, add, Etc.?  Send us a note and it will get added based on merit.
  16. We’ll be adding Big-Box Discounts to ABL-Help Classic and Pro for the next release and you should be using this tool anyway.

Yet another ineligible to consider.  ABLTrain Icon

Further Reading:

http://www.reuters.com/article/2015/06/24/us-wal-mart-stores-suppliers-idUSKBN0P400K20150624

http://www.wsj.com/articles/wal-mart-ratchets-up-pressure-on-suppliers-to-cut-prices-1427845404

http://www.scdigest.com/assets/on_target/15-07-06-1.php?cid=9481

Copyright © 2015 Clear Choice Seminars, Inc.  All Rights Reserved

Images licensed from Fotolia.com or created by Joseph R. Caplan © 2015  All Rights Reserved

Why a CPA / CA Audit is Not Good Enough for ABL…

NOTE / DISCLOSURE: We [FinSoft, LLC] make great ABL Audit (AssetWriter) and download software (AssetReader / Asset Archive, AssetArchive Confirmations) that do extensive analysis without the time needed to adjust things.  Our ABL field exam software can even consolidate hundreds of divisions with just four mouse clicks or bring in data from other examiners and AssetReader downloads.  Our AssetReader setups are often shared with Operations and Field Exam for fantastic integration and cross-department consistency.  AssetReader download software pulls in reports that no other software in the world can.  That means real-world time savings and happy users too.  Our training courses are the high standard of the industry and we take a lot of time to write and prepare our courses – see www.abltrain.com for our self-paced ABL Training Seminar Courses for your education needs.  Finally, the author of this Blog is a CPA and this article sheds light on what the scope of a CPA or CA Audit covers and does not cover (CPAs / CAs will be happy with scope clarification).

Stand in The Borrower’s Shoes for a Minute

It is not surprising that the Borrower, especially a Borrower that has no ABL experience would ask about why they need to have and pay for an ABL Audit.  Consider their position:

  • They just paid $$$$$ for an audit
  • They just went through the time it took to get that audit done
  • They will incur additional fees for the ABL field examination per day
  • They might incur travel expenses for the field examiners
  • The ABL is not willing to share the examination with them
    (just the negatives findings)

Looking at that Borrower list of reasons, maybe you’re glad it’s not your money and you’re not a Borrower?  But the cost of doing a commercial loan is a combination of fees, interest, legal, Accounting, Audit, Field Exams, Appraisals, background checks, Etc.  WOW that costs some $$$$$!  Getting that loan is more than just interest cost to the Borrower.

… and after a minute of reflection, the Borrower’s voice …

“But I just had a CPA / CA audit…”

 

Bakers dozen rolls

 A baker’s dozen – Why the ABL Field Examination?

 

1. Taken as a Whole

The Black Sea coast with shipCPAs / CAs provide an opinion on the financial statements “Taken as a whole.”  So what’s that really mean?  It means that there might be a little bit of error here and there, but the numbers are approximately right.  Some people liken this to “how out of focus the vision of the truth is.”  Imagine seeing a ship on the horizon, but not being able to determine the color, the size or the type of the ship.  As it approaches you get more details and a better picture and your brain sees it as a cargo ship, but you never get too close to the details like the railings, the ladders, the doors as you stand at the shore.

Taken as a whole means that the positions stated on the financial statements are approximately correct and not materially wrong.  How much would your opinion of a company change if you knew the numbers for revenues, income, assets, liabilities and equity were approximately 95% correct.  A similar company would still be comparable and you would not be materially mislead, just a bit out of focus in one or more areas, but it would be correct when taken as a whole.

Asset Based Lenders need more details because the error in their collateral should be small and while one asset deficit could be offset by another asset’s surplus and it is a good 95% correct when taken as a whole, that is not good enough to monitor and lend on collateral that needs to be more in focus.

2. Point in Time

Maybe you’re a neat person and when you have company at your house or business, always in perfect order.  Or maybe when you have company you cleanup a mess and shove stuff in the closets, basement and garage?  At the point in time that your guests arrive, all is neat and orderly.  Accounting data is often a mess and it takes a lot of cleanup work.  Sometimes the adjustments from prior years are not booked to the accounting system and the CPAs / CAs make a cumulative prior year(s) adjustment plus the current year adjustments.  It looks all nice and neat when you get those crisp cotton bond pages bound by the CPA / CA firm doesn’t it?  But there is another story about how it got to be that way.  It is often a massage this, nip that, tuck this, adjust that process to get to a CPA statement.

That CPA / CA report is probably OK when taken as a whole and for the time periods shown (people worked hard to get it that way).  But an ABL lender needs to get reports at least monthly and perhaps daily or per borrowing in some cases.  How reliable is the reporting on a daily, weekly or monthly basis?  The CPA / CA audit has no focus on that.

3. Finding Dilution

Due Diligence and DirectionDilution to an ABL Lender is the non-cash adjustment that washes-down the AR collateral.  Put another way, “Does a dollar of sales turn into a dollar of cash?”  In general, the answer is no.  But the CPA / CA audit is showing all of the numbers net of these adjustments.  Many adjustments are credit memos, charge-backs, write-offs, finance charges and finance charge write-offs, cash discounts, short pay adjustments and more (see below).  The audit report does not show these adjustments and the audit itself might not look at these adjustments at all if they are considered immaterial or when the accounting treatment is considered sound and when it properly states the net balance based on professional judgment of the CPA / CA.

Asset Based Lenders take dilution seriously and it is a big factor in the analysis of advance rates used on the Borrowing Base Certificate.  Someone (a Field Examiner) needs to go in and do a “history lesson” on the monthly sales and collections and adjustments that run through AR, Inventory and often payables too.  It takes time and patience to focus on those collateral dilution and adjustment issues.

4. Discounts and Allowances

The section above mentions discounts and allowances and a first year accounting student would know that those amounts come right after revenues.  But the CPA / CA audit presents revenues as a net number (and as noted above, net of the credit memos, write offs, adjustments, finance charges, Etc.).  So looking at revenues on an audit is not helping you to know about these discounts.  A lot of companies don’t bother with this category at all, they just issue credit memos for any receivable write-down.

The ABL Lender needs to get a grasp on this reporting to determine if the discounts and allowances are processed against AR and when.  Not a big deal if they have no discounts and allowances or it goes somewhere else like through credit memos.  The question is all about how much dilution comes from that category and will the lender get that information in a timely reporting manner (rather than a year-end cleanup by the accountants).  The focus on this area might show empty entries (for good or bad reasons) with timely entries or delays in processing the adjustments.  As long as it is approximately correct at the date of the year-end audit, then it is not materially wrong as presented by the CPA / CA firm.

5. Net Sales (find the credits)

The books and records might have credit memos processed every month.  In some cases the volume of credit memos might be just 1-3% and in other cases 10-15%.  But the CPA / CA audit shows net sales and the volume of credit memos is hidden from sight.  Ongoing new sales have not yet gotten the cleanup treatment (it can take a day or weeks or months).  Did the accountants consider the credit memos that might dilute the outstanding receivables when formulating reserves?  How much is that?  I’ll bet you can’t see that on the financial statements taken as a whole.

The ABL lender needs to get the timing and the volume of these credit memos and gross-up the net sales so that dilution can be computed against the gross billings.  Some formulas:

Net Sales + Credit Memos = Gross Sales
Gross Sales – Credit Memos = Net Sales

Obviously the ABL Lender wants to know how much cash a dollar of sales can make and it is usually not a dollar.  So gross Billings is the “dollar” in this case and the credit memos and other non-cash adjustments are the dilution against that dollar.  A selection of the credit memo activity is usually analyzed to see what drives the credit memos (by reason code) and how dilutive the items might or might not be.  But it takes a focus on the AR Stats to get that information and audit reports taken as a whole just don’t have that.

6. Records

Business NerdA Lender that specializes in ABL needs to have good records to rely upon because of the monthly, weekly, daily reporting requirements for the Borrowing Base.  It is financial statements (Income Statement, Balance Sheet, Cash Flows, Reconciliation of Retained Earnings, reconciliation of collateral documents to the Borrowing Base, Etc. ) that are needed.  But lenders that do daily or as-needed advances might want billing journals and cash journals or even inventory reports.  The field examinations from the Lender could take a long time if the records are a mess and require manual adjustments.

ABL Lenders want push-button quick accounting extracts and reports.  They want to focus fast and clearly and they want it to be reliable.  But how reliable is it?  It takes on-site field examination efforts to determine that.  Also, revisit #2 above, the audit was a cleaned-up point in time, not necessarily how it all works day-to-day.

7. Monthly Trends

Following the Trend IndicatorsThat annual audit is indeed a point in time with this year and last year all cleaned up.  But seasonal trends can show a top and bottom for financial needs and even seasonal losses.  The deal structure should accommodate those needs.  But the audit has just one (or two) points in time and that is not going to show all of the different trends and seasonal needs.  Asset Based Lenders require trended data to see the past and help companies through trend cycles.  A monthly focus?  Yes, but weekly or daily in some cases.

8. Inventory Goes Round and Round, or Maybe Some Just Sits?

After the CPA / CA audit has evaluated many things and the numbers are about right when taken as a whole we get a nice Inventory number.  If inventory turns in 90 days, then by the time the audit is issued, the inventory would have turned over in many cases.  Those net inventory numbers (net of a reserve for this, a reserve for that…) are constantly changing due to sales and purchases.  Can the Borrower report in a timely manner to the lender?  How much did the CPAs adjust at year end?  How reliable are the inventory reports that will be sent to the lender?

It is through more detailed testing that the Lender can perform test counts, cost testing and turnover analysis.  Maybe the Lender can discover a slow moving or obsolescence report?  But the point-in-time nature of an audit is not the balance right now and the point in time cleanup of the accountants is not going to help with reliable and ongoing accounting that gets reported to the Lender periodically.  The ABL Lender needs to focus on the reliability of reporting for inventory.

9. Software Downloads

My career in Audit started in 1984 and that included some downloading of data via 1200 baud modem using Kermit.  We could pull monetary unit samples from large companies for confirmations and inventory selections.  But we still did a ton of spreadsheet stuff to get numbers collated and corrected for many audits.  Fast forward just 30 years to 2014 and manual adjustments, messy agings and inventory reports are still here.  Yuk!, you sure don’t see that in that spiral bound audit report.

Can you download data from their system and get it processed correctly?  Can the Borrower report electronically at any time?  What is the depth of the available reporting (AR, Inventory, AP, Sales and cash journals, Etc.).  Great tools make difficult or impossible reports available for electronic analysis [yeah, we make the software that does this].  A focus on data gathering is a big win for the Field Examiners and the Operations staff and when tracked over time, that data can reveal problems before a field examination and data can feed confirmations or requests for documentation from the account officers.  It saves a lot of staff time and that reduces operating costs for the lender.  It reduces fraud and mitigates losses too.

10. Financial Analysis Details

financial statement detailsA typical audit will include the required elements in an audit such as a Balance Sheet, Income Statement, Statement of Cash Flows, Reconciliation of Retained Earnings and Footnotes.  Bigger divisions (ten percent or more) will be listed with some additional detail.  But most of the items shown are net of all adjustments and are rolled-up from many related categories.  For example, SG&A expenses will appear as one line, yet may contain 500 lines of detail.  Same with cost of sales.  The Balance sheet items might be net of reserves and they will certainly be net of the CPA / CA adjustments that bring the numbers back in-line to materiality requirements (see below).

The ABL practitioner needs to see details and support for the numbers in the financials.  I could list dozens of examples but consider just one here.  A company that builds delivery or maintenance trucks of some kind records revenues when the finished truck has passed quality control inspection.  Yet the P.O.s  from the customers clearly state “FOB Shipping Point.”  That little difference in title transfer and revenue recognition was $2.5 Million in Gross profits and it made it through an audit from one of the biggest accounting firms in the world.  You need to get closer to the detailed numbers to see the netting and accounting of the data both month-to-month and then as presented and that annual audit report to help assess reliability.

11.  CPA Materiality Percent ±

The word “Materiality” may be calculated by the CPA / CA on a per Asset and “Taken as a whole” basis.  For example, the AR might be off by ±3% and the inventory might be off by ± 4% and fixed assets might be ± 1% with an overall materiality of 4% or 3%, Etc.  Note that some of the testing depth is based on internal control strengths and weaknesses.  Weak internal controls will mean more testing in a given area and could mean, for example, the difference between CPA / CA test counts of well controlled inventory and a total count of sloppy inventory (the latter more expensive and a clue to an Asset Based lender that inventory accounting reliability is maybe not so good).  But the audit does not mention the hours spent fixing the problem, it only reflects the need to get the net to the materiality level.

With 3% materiality, would you care if AR is $10,000,000 or $10,300,000 or 9,700,000 when considering the overall size of the company and performance?  Probably not as an investor, but as an ABL lender, you want to know that receivable collateral is 100% correct and properly reported.

The original inventory could have been -12% and then the CPA / CA adjustments put it back to ± 3%.Remember the CPA / CA audit will adjust those errors out from testing that they do and they will get those numbers closer to 100% correct through adjustments.  The ABL Lender is getting real-time push-button reports every month or week or day and they are not adjusted.  So how good are the reports when the audit minions are not adjusting things?  That closer look validates the reporting accuracy and some findings can lead to reserves.

12.  Lifestyle of Owners

Luxury yachtWay back in my Barclays days, I heard about a deal (Leveraged Buyout) that had a wild-child new owner that took the Loan money and had a blow-out loan closing party, purchased an Aston Martin and proceeded to live a great lifestyle with the corporate credit cards to the tune of $100,000 per month (a mistress too).  And his wife had a company that made very simple railroad freight car products and she was pulling $200,000 out of the company with close to no sales dollars.  Yeah the deal blew up.  I have not yet seen a CPA / CA audit report with pictures of the owner on her yacht or with her Ferarri collection, so the audit report paper is barely two dimensional in many ways.  Yes, some owners are self-made inventor / investor types, but they can still have a cash draining lifestyle.

Hands-on data gathering, background investigations and just being there matters.  Asset Based Lenders may allow the cash flow to the owners to be consistent with earnings performance and you need to get a little bit closer and more in focus to see that.

13. Confidence to Make Decisions / Exception

Finally, when you look at the dozen items above and we have that ABL field examiner (and appraisers and background checks experts) checking it all out, we have more field-level intelligence to work with.  That might reveal some reserves that need to be in place here and there, but the collateral reporting and control is now smarter too.  When decisions from the Lender are needed, there might be greater confidence from the tighter record keeping and past field experience so that exceptions and problems are respected and trusted enough to keep the company going.  No interest rate of fee or cost or audit report can compare to the value of building a company with a partnership of Lender and Borrower confidence.  Closer and in focus knowledge matters.

Conclusion

The CPA / CA Audit shows us the adjusted and GAAP accounting presentation with rolled-up summary numbers.  That is a foundation to compare internal records against.  But it is an overall big picture and taken as a whole approach that lacks details for reporting and loan monitoring.  We ABL people sure do look at a lot of detail on specific areas that a CPA / CA report just cannot show.  More detail puts the ABL issues in focus.   ABLTrain Icon

Copyright © 2015 Clear Choice Seminars, Inc.  All Rights Reserved

Images licensed from Fotolia.com or produced by Joe Caplan