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Tips for Selecting Asset-Based Lending Software

Published in The Research Letter on Workstation Computing

What are Asset-Based Loans?

Asset-based loans are loans that are secured by the borrower's accounts receivable, inventory, or other assets. The bank determines the value of the borrower's pledged assets, lends against that value with an appropriate margin, and assumes responsibility for collecting the receivables from the company's debtors. In effect, the bank buys the borrower's accounts receivables at a discount.

Asset-based lending (ABL), for many banks, represents the last frontier in high-margin loans. If your bank is venturing into asset-based lending, there are a number of PC-based programs that can minimize the problems that come from this high maintenance activity. Look for specialized software, and follow these simple tips we got from Traude Christeson, President of Dynamic Interface Systems Corporation.

Mainframe Programs Not Available

Ten years ago, sophisticated documentation, tracking, and collection software programs for ABL were not available. You had to rely on generic mainframe financial systems, which were prohibitively expensive to customize for ABL.

But with the recent emergence of more advanced PC-based applications, reporting, repayment tracking, open credit line calculations, asset management, and other accounting activities that once required weeks to complete can now be accomplished in minutes. This allows smaller banks to enter the lucrative ABL market with minimal start up costs, training, and system maintenance.

The Right Software Important for Success

Once you decide to incorporate ABL into your overall loan function, you need to choose the right software. The major difference between asset-based lending (ABL) and traditional commercial lending is control - knowing the exact status of your asset-based loans at all times - and how to get your money out of the collateral if the loan goes bad. Your software must be able to help you track the true market value of the inventory, as well as its liquidity should you need to seize assets.

To choose ABL software, first objectively evaluate your current loan management system, including your manual controls. If you have any unidentified problems, the new software will only make the mistakes faster. You may want to use an outside consultant to get an impartial analysis, but you can do much internally. Here are several key points to consider when evaluating software to handle ABL.

If possible, choose the software before making a hardware purchase. If you plan to use existing hardware, consider compatibility. Also, make sure that the software is expandable, not only in terms of the number of customers that it can service, but in the number of relevant features it offers. The best programs are modular and are able to grow in response to changing needs.

Make sure the software can:

process asset-based loans
calculate interest properly
produce timely reports
red flag delinquencies and first-payment defaults
accurately reduce principal

Can the software track the following about the borrower and the loan?

What is the company's normal borrowing pattern?
Are you maintaining pre-agreed margins?
How frequently is inventory audited?
How fast do receivables turn over?
How many invoices are more than 60 days past due?

Make sure the software has a history of being upgraded.

If you are replacing an obsolete system, remember that the new system you are buying will become obsolete someday, too. The trick is to stretch the time between replacements. Check the frequency and comprehensiveness of program updates and new releases, and ask why the vendor made the changes.
Make sure any ancillary programs have the same menu arrangement to make employee retraining easier.
The software should generate detailed customer histories, audit trails and agings, transaction reports, past-due notices at predetermined intervals, and individual account ledgers.
Look for a strong manufacturer commitment to support. If they don't brag about it, they probably aren't serious about it. Phone support is critical; it will be your primary source of problem solving. Make certain it is available during the hours you need it.