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Asset-based lenders find ways to address supply chain woes

In a world where supply has been unable to meet demand, lenders have been kept on their toes finding innovative ways to keep the wheels of the economy turning. Bob Dean and Charles Sharf of White Oak Commercial Finance explore some key trends.

Bob Dean

To survive and thrive in 2021, US companies had to be resourceful and flexible. So did their lenders. The supply chain crunch that gripped the world created long delays, unpredictable delivery schedules and soaring transportation costs. Companies didn’t know how much product they would get, when it would arrive or if their customers would still take it. Lenders couldn’t fix supply chain problems, but many were able to help their clients navigate them by coming up with creative solutions on a case-by-case basis. It was a learning experience for everyone involved.

One thing is clear: demand was not the issue in 2021. As the virus receded, then returned, we witnessed consumers continuing to spend heavily in the stores and online, thanks to a resurgent economy and government stimulus cheques. In October, ahead of Christmas, US consumer spending rose 1.3 percent,  according to the US Department of Commerce – a very robust performance. On the supply side, it was a different story. Simply put, supply could not keep up with demand. Products piled up in ports on both sides of the Pacific, and ‘supply chain’ became an expletive in the world’s vocabulary.

The problems affected a wide range of companies. Those that rely on products manufactured overseas were obvious candidates. But even domestic manufacturers with ties to global supply chains had difficulties. The Wall Street Journal on 26 October, 2021,  profiled a Utah maker of hot tubs that used parts that came from seven countries, 14 states and travelled a cumulative 887,776 miles to make one tub.

The tangible problems caused by the crunch were easy to see. The less visible financial problems quickly caught up with and continue to plague the economy. Companies needed a way to raise cash and lenders needed to find ways to provide it on a timely basis. In some cases that meant utilising funding solutions that would not see much daylight in quieter times.

Lending against goods in transit falls into that category. As the name implies it is a loan tied to inventory while it is on a ship, say from Shanghai to the Port of Los Angeles. Not all commercial lenders are willing to make such loans because the process is complicated and comes with risks. Lenders must have accurate documentation and the ability to monitor the movement of goods at all times. Even when a ship has reached port, there are hurdles to overcome. If goods such as food are not released on time, they can spoil; other products cannot miss critical deadlines.

Finally, ports can levy penalties on companies whose cargo sits at the dock for too long. In-transit loan providers must account for all these contingencies. Lenders with experience in this field are able to assess many possible scenarios and find creative ways to put cash into the hands of borrowers impacted by delays and associated costs.

Charles Sharf

Another important financing tool employed by lenders is flexible credit limits. Some borrowers exceed their limits because they have to buy goods in advance and their suppliers demand quick payments. Others find themselves bumping up against their credit limits because business is robust and their accounts receivable and inventory has increased dramatically. Whatever the reason, these companies require lending partners with deep knowledge of their respective industries so they can get a timely decision on boosting credit lines.

The range of solutions possible in an asset-based lending structure highlights the importance of this category during the pandemic. Because asset-based lending is a funding vehicle based on collateral, it can be evaluated in a shorter period of time than traditional forms of financing. Private asset-based lenders, which are non-regulated, are often well-positioned to respond and increase credit limits quickly to meet the needs of clients that must order product further in advance and make rapid purchase decisions to offset supply chain-related delays.

The impact of today’s challenges has forced many businesses and their lenders to increase their due diligence efforts, while recalibrating the risks involved in every transaction. Both sides need to be willing to adapt on the fly as conditions change to successfully navigate unchartered waters.

As lenders, we continue to take our cues from our clients, who prove themselves remarkably flexible and resilient as they cope with new challenges. They have become increasingly resourceful and are making difficult but necessary business decisions to overcome product delays, rising freight costs, and labour shortages.

Uncertainty hasn’t gone away. The latest covid variant is making its way around the world and may bring with it additional strain on the beleaguered global supply chain. No matter what lies ahead, the past year has illustrated that asset-based lenders must keep their ears to the ground, proactively communicate with clients and continue to utilise the full range of funding options at their disposal to help businesses weather tomorrow’s market disruptions.

Bob Dean is executive vice-president and managing director of risk management and Charles Sharf is managing director of originations at White Oak Commercial Finance