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Private asset-based lender line of credit rates - what would you expect to see?

Per Larson's Profile

My firm is evaluating sources of private debt, and received a term sheet from a private PO and asset lender.  The LOC they offer would be secured by inventory.  Note that because of existing debt on the books due to the founder's family a bank LOC is difficult to get.

 - $500k LOC @ 3% monthly for the value drawn down

 - 0.95% monthly fee for the balance of the LOC (unless we draw down more than $250k)

 - 1 point closing

What is your experience with such lenders, and ideally, what rates did you pay on the money?

Answers

Bryan Frey
Title: VP Finance/Corp Controller
Company:
(VP Finance/Corp Controller, ) |

We recently did a debt deal with a bank secured by IP (we don't have inventory) that had 1 point closing, 1 point at the end of the term, and prime plus 2.0% annual rate. Plus 2.5% warrant coverage. Yes, that was a different deal than you have, but we looked at bank and non-bank lenders and got similar pricing from others.
Your deal looks like very expensive money. Do you have any ability to get a second bid? With no alternatives you have nothing to negotiate with (I know you know that) and the ability to negotiate with confidence can mean a lot of $ saved. This just feels like a really tough deal. I'm sure you wouldn't be looking at that if you had a lot of alternatives, but keep looking for other stones to turn over.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

We used a private ABL around 2005. Interest was at max usury rate: 24%.

We are were finally able to get a sweet-heart loan, with a PG by a billionaire for 8%. That enabled us to a) grow, and b) pay the loan off, within terms which then permitted up to grow again.

If we weren't able to get that sweet-heart loan, we would have gone out of business or at the very least, not grown much (some of the limits on growth was the way in which the principals ran the business and not totally from the stifling cost of money)..

Topic Expert
Joseph Ori
Title: CEO
Company: Paramount Capital Corporation
(CEO, Paramount Capital Corporation) |

That is very expensive money and you should be able to do better from asset based lenders/credit cos like foothill, direct capital etc. This is also a secured loan and assuming your inv is turning, would shop around for a cheaper deal.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

You're right, but I didn't/can't paint the whole picture. With it, you'd understand the dilemma faced up till the time the client and I went separate ways... (on-going managerial/financial issues no matter how profitable or not the company was).

William Williams
Title: Consultant
Company: Self
(Consultant, Self) |

Are you earning enough to service this stuff?

Topic Expert
Joan Varrone
Title: CFO
Company: Cloud Cruiser
LinkedIn Profile
(CFO, Cloud Cruiser) |

I think the rates depend up the financials of the company. If you are losing money with a long ramp to reach profitability and not backed by a funding source (such as a VC), you can see rates of 2% per month for a factoring type of arrangement plus other fees.

If you are making money but need the funds for working capital or are VC backed then the rates are in the prime plus 3 to 5%.

Best
Joan

Gary Honig
Title: President
Company: Creative Capital Associates Factoring Co..
LinkedIn Profile
(President, Creative Capital Associates Factoring Company) |

If the Private Lender is an established commercial finance company they will want to make sure that the "family loan" is subordinate to the new financing. If the family loan is informal they may have not filed a UCC-1 to secure their position.

Generally speaking, debt financing based only on inventory is very difficult to obtain. Only a few lenders in the US will do it - unless there is a considerable dollar amount < $10M and the borrower has great financials.

Opiners will bemoan the cost of funds, but I would ask you this; would you lend your neighbor $10,000 with the chance of losing it all for only $300.00? Most would say no way.

To specifically answer the question, if you have a lender that will actually fund the deal as is at the terms described, my experience says it's a fair deal in the current economic marketplace. A tough decision for the borrower, I can only speak to the lending conditions as I see them cross my desk daily. You could shave some percentages, but your only leverage is the strength of your balance sheet. If it's strong and the owner has a high FICO then it's worth shopping. Otherwise a deal like this will take a big loop around and end up right back at the same lender becuase everyone knows they are the only ones who might do it.

Topic Expert
Barrett Peterson
Title: Senior Manager, Actg Stnds & Analysis
Company: TTX
(Senior Manager, Actg Stnds & Analysis, TTX) |

3% monthly? Very expensive, even if your financial condition is very weak. I would expect to see a requirement to subordinate the debt to the owning family.

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