Independent Banker - July 2017 - 53

list their receivables and inventory,
and then the bank will determine
how much it will lend.
Setting guidelines
Banks considering ABL need to fi rst
determine what types of receivables
and inventory they will accept, Bradshaw
says. There are higher advance
rates on receivables than inventory.
Generally, foreign receivables are
excluded and government receivables
need to be separately addressed
because they take longer to be repaid.
Banks should also consider credit
insurance on foreign receivables.
Banks should then decide whether
to lend just on fi nished goods or also
work-in-progress, as well as the type
of product the customer is selling.
" For example, if the inventory is
frozen fi sh, the product is only good
for so long, " Bradshaw says. " It also
depends on whether the customer
is a manufacturer or an assembler.
If a customer is a manufacturer that
builds engines, then the inventory
should be the fi nal product and not a
bunch of parts. "
Perhaps the toughest challenge
of ABL is monitoring for fraud, says
Edward P. Lewan, president of Mackinac
Commercial Credit, a division of
the $978 million-asset mBank in Troy,
Mich. The best mitigation is having
ABL customers use a lockbox established
by the bank, so that all of their
clients' payments come directly to the
bank to pay down the ABL credit line.
" The key is dominion of funds, as
we're controlling the cash that comes
from their customers directly into the
lockbox, " Lewan says.
As well as fi eld audits, Mackinac
Commercial Credit's staff makes
random customer calls to confi rm the
amounts of sample invoices on the
borrowing base certifi cates for each
advance. It also tries to obtain personal
guarantees from its ABL customers.
MBank's chairman, Paul Tobias,
says it's critical to have ABL staffers
with the expertise to understand each
customer's payment pattern.
" It's important to be able to
spot a sudden dip in collections or
something that's not quite right in
terms of cash fl ow, " Tobias says.
" But if you control the risk well, you
can end up with loss ratios that are
very comparable to loss ratios for
commercial loans, yet the yields are
signifi cantly higher. For example, if
we price a commercial loan at a 4.25
percent variable rate, Ed [Lewan]
is going to probably get 8 percent, 9
percent or even 10 percent. "
$20
million
Value of ABL deals First
National Bank has on its
books or in the pipeline
Tracking solutions
Software and services provider
Profi tStars offers ABL lenders
accounts-receivable fi nancing and
other collateral management programs.
Banks using such software can
track customers' inventories to spot
slow-moving products or determine
when products are no longer eligible
as collateral for the ABL credit line,
says Jay McKinney, senior director
of operations for Profi tStars Lending
Solutions Group in Birmingham, Ala.
" If you control the risk
well, you can end up
with loss ratios that are
very comparable to loss
ratios for commercial
loans, yet the yields are
signifi cantly higher. "
-PAUL TOBIAS, MBANK
Terry Renoux, the division's group
president in Brentwood, Tenn., says
this kind of software makes it easier
to track and manage receivables and
inventory using new technology, such
as the ability to electronically upload
data about the collateral. " We're
seeing a big buzz, especially from
community bankers, who realize they
can do this paperless and be more
effi cient, and they don't have to hire a
bunch of people if they don't have the
wherewithal, " Renoux says.
In addition to software, Profi tStars'
ABL experts can accompany bankers
to prospects' facilities to help structure
the credit lines and facilitate
deals, he says. It will also help fi nd
other banks to participate in an ABL
deal if it is too big for a small community
bank.
The $375 million-asset First
National Bank of Vinita in Vinita,
Okla., uses software to handle the
health care industry's specialized
receivables for patients with Medicare,
Medicaid or private insurance,
says J.R. Morris, its assistant vice
president of commercial lending.
" Any given hospital may bill
$40 million worth of receivables, but
they may be really worth $10 million
or $25 million " depending on how
much insurers or the government are
willing to pay, Morris says. " The software
allows us to take the historical
billing data and with intensive analysis
match that up with the hospital's
true collection rates. This gives us a
lot of comfort and confi dence in what
those receivables are really valued at. "
First National's chief executive,
Dee Robison, says the software helps
the bank track different types of
collateral not only for health care
facilities, but also for other ABL customers
in different industries.
The business line has proven to be
very profi table, and it's growing; First
National booked $15 million of ABL
deals last year throughout the Midwest
and other regions and already
has another $5 million in the pipeline.
" For a bank our size, those are very
signifi cant numbers, " Robison says.
" Quite frankly, we can't lend enough
on conventional loans in our area of
the country to be a bank of this size, so
we have to stretch our wings quite a
bit and operate in niches like this. "
Katie Kuehner-Hebert is a writer in
California.
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Independent Banker - July 2017

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