CADENCE for Inventory
Supplemental collaterals include real estate, securities, letters of credit, and inventory...
The Problem:
A lender had a solid prospect; a growing business with working capital needs. The business was a high performing, tier-one aerospace supplier with a strong management team. The problem was that the cash flow needs extended beyond the accounts receivable value. The suggestion was made to offer an inventory accommodation to bridge the gap. The initial objection centered on the fact that the lender did not have a system to deal with the day to day risk and valuation strategies.
The lender had tried to make inventory loans in the past but had experienced great difficulty with managing them. After a few close calls, management decided to avoid inventory altogether. Consequently, the lender lost out on several significant deals because competitors were able to make the inventory work as a collateral type. To make matters worse, the lender lost a number of client’s who to competitors for the same reason.
The Solution:
After a great deal of searching in the marketplace, the lender found CADENCE|ABL, which allows lenders to blend collaterals types for “customized” lending strategies. Blending assets to establish an overall availability which can be used to safely support a client’s loan balance has expanded the number of customers lenders can now reach.
CADENCE|ABL with Inventory allows inventory values to be broken down by components and into categories, applying different controls over the various segments. It provides a method to apply higher advance rates for more favorable components of inventory and lower advance rates for those inventory segments that naturally carry a lower realizable value. For some inventories, limits and advance rates may need to be applied at the category level rather than a single global rate.
Additionally, this lender found that CADENCE|ABL could apply constraints needed to control seasonal changes. Nobody wants to get to the end of a selling season carrying inventories at peak levels, so there needs to be a system that remembers and makes those adjustments automatically. CADENCE|ABL provides a solution that substantially limits that risk.
The lender was delighted to find that a second inventory valuation method reflecting market values or net realizable values was also available. They found that their old process of using the Client’s reported inventory book value wasn’t being used as the sole basis for value anymore. CADENCE|ABL not only costs the inventory at net realizable values but also reserves the projected expenses associated with liquidation. The alternate market value is then used to compare the traditional values for lower of cost or market to determine availability.
CADENCE|ABL with Inventory users find that matching the appropriate method of valuation helps quantify the acceptable risk and strengthens customer relationships. Even more important is the assurance that the pricing structure is appropriate relative to exposure.
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