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Getting Creative with Asset-Based Lending

Nick Coetzee | March 13, 2018

In 2016, M&W Hot Oil was having trouble obtaining a loan. The 30-year-old Texas-based oilfield services company needed to invest in technology and geographic expansion, but found traditional lenders were averse to lending to an oil and gas company. Then Curtis McKee, owner of M&W, received a recommendation to connect with asset-based lender GemCap. They reached out to GemCap in late 2016, and partnered in early 2017.

GemCap’s deal with M&W Hot Oil is just one example of how the firm sees opportunity where others can see red flags. I sat down with Jim Thieken, executive vice president of GemCap, to learn more about the firm’s strategy.

What is GemCap?

GemCap is a a senior secured asset-based lender serving the small to mid-cap markets. We provide asset-based revolving debt facilities backed by inventory and accounts receivable, factoring lines for accounts receivables, and term loans backed by machinery and equipment, real estate and intellectual property, in amounts ranging from $50,000 to $10 million. Our mission is to provide clients with flexible financing solutions and great customer service.

What differentiates GemCap from other lenders in the market?

Our team is not made up of bankers. GemCap’s management team is comprised of individuals who have extensive backgrounds in company operations and liquidation, so we look at transactions objectively from an operating standpoint. We are industry agnostic because basic business process applies across all industries. Partnerships are successful when you can structure financing solutions cooperatively with a borrower, and then the borrower is able to manage expenses and execute its business according to its plan and timeline. We don’t assume risks in the same way that most other lenders will given their lack of operational experience and lack of creativity when structuring a financing product.

What is the typical journey that leads borrowers to GemCap?

Many of the companies we service have historic operating losses, are scraping together resources, and realize they’re in a bind. They have a compressed timeline. Companies will typically look first to banks, often to no avail. Due to compliance and regulations, banks are looking for clean credit with little risk. Then these companies find a broker, who will refer them to us. Very few other lenders lend against IP, real estate, machinery/equipment, A/R, and inventory all under one roof like we do.

What’s an example of when your operational expertise has played out when working with a client?

We partnered with a Midwest rancher who needed financing to recapitalize ranch operations and acquire feedlots for cattle. The rancher was in a cash bind, on a tight timeline, and had acres of crops, livestock, machinery, and equipment, but needed a way to lend against fields that weren’t yet operational. He initially went to a bank and a couple of private lenders, but there were too many moving pieces for most to finance the deal entirely in-house (which he needed because of his narrow time constraints). Once he had exhausted all of his traditional options, he hired a broker.

The broker came to us. As we were evaluating the different ways we could collateralize his assets, we started to focus on the heart of the problem — the fact that his feedlot wasn’t operational, which meant other lenders looked at the value of the acreage as merely the real estate that it sat on. Firms could lend against the cattle, the hay, and the machinery, but that wasn’t enough to pull off a packaged deal to get him the capital he needed while managing the risk. We soon realized that the other lenders were leaving future crop yield and future income streams on the table. This was something we could leverage that other lenders couldn’t.

We looked at his inventory, and determined where he needed to be at specific future time intervals in order for this to work. We looked forward 90-120 days: he’s got hay in the field, and cattle to feed crops. We could calculate the average take per acre, and lend against product in a field that had barely sprouted. Most wouldn’t lend against future yield like this. When we realized we could lend against projected hay and cattle yield, we incorporated a bridge financing aspect to service their needs with that added component.

What advice can you give to company owners?

  1. Obtaining a loan does not happen overnight. Even in GemCap’s case, and we are one of the more nimble lenders in our space, four to five weeks is typically needed. Finding a good broker or capital provider who can get the company to trustworthy lenders is also key, as a debt raise is difficult to do without good contacts in the finance industry.
  2. Be open-minded to debt. An appropriate amount of debt can help launch a company to new heights through top line sales improvements, improved processes, improvements to hard infrastructure, and improvements to workforce quality.
  3. Avoid paralysis by analysis (to quote GemCap co-president David Ellis). Don’t spend an extraordinary amount of time analyzing debt offerings and continually going out to the market in an attempt to determine that you achieve the best price. CEOs rarely factor internal and external opportunity costs for the perpetual delay.
  4. Raise debt in conjunction with anticipated tax savings. I’m sure many companies are looking to reinvest recent tax savings and likewise many of those may be looking to utilize these savings, in lieu of debt, to improve the business without taking on or increasing the company’s debt burden. However, the more prudent approach for companies at this time would be to further leverage the company’s position in a growing economy. With increasing inflation and bond yields, there will certainly be some pressure on companies obtaining debt, in the form of increased cost of capital.

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