Asset Based Finance: Proven Disciplines for Prudent Lending

By Grusd, Neville | The CPA Journal, June 2005 | Go to article overview

Asset Based Finance: Proven Disciplines for Prudent Lending


Grusd, Neville, The CPA Journal


Asset Based Finance: Proven Disciplines for Prudent Lending By Gregory F. Udell Published by Commercial Finance Association, 2004; ISBN 0-9667943-2-X 283 pages; $79.95 (hardcover)

This book, designed as a textbook for the lending industry, is directed at helping readers understand how asset-based lending operates; how to prepare accurate financial statements with proper disclosures when working with such lenders; and how to advise their clients or companies about obtaining the best type of financing for their needs and where asset-based lending would be appropriate.

Prior to his academic career, the author, the Bank One Chair of Banking and Finance at the Kelley School of Business of Indiana University, was a commercial loan officer with asset-based lending experience at various banks.

Part I reviews asset-based financing and describes the asset-based lending philosophy in comparison to traditional commercial lending. Chapters 1 and 2 provide an excellent introduction to the subject, explaining clearly how asset-based financing works and when it is most beneficial. Chapters 3 and 4 address the structure of the asset-based industry and where it fits into the economy.

Part II, a detailed explanation of the process, includes how lenders analyze the borrower (Chapter 5) and the mechanics of lending against accounts receivable and inventory (Chapter 6). These chapters are essential reading. Understanding how an assetbased lender thinks is of great benefit.

Some important points are not covered in the text, but are referred to in the later case studies. These include lenders' reliance on projections (which CPAs should be heavily involved in preparing), and their discretionary rights incorporated in the typical financing agreement.

Subsequent chapters in Part II deal with other aspects of secured lending, including a brief introduction to factoring; floor-plan financing; and lending against equipment. The final two chapters, dealing with borrower bankruptcy and organizational issues in the industry, are probably of less interest to accountants.

Part III comprises four case studies. These excellent presentations reinforce and expand the theory set forth in earlier chapters. The cases deal with financing a small firm; a mid-sized firm; and a distressed credit. Anyone interested in this topic should study these cases, which are well presented and contain much useful information. An additional case study on factoring supplements the earlier chapter on this type of financing.

Part IV includes special topics in assetbased finance. The first chapter in this section is on fraud, which is a very interesting topic for accountants. While written from the perspective of the lender-usually the victim of the fraud-the text and case studies will help accountants sharpen their audit techniques and internal controls to guard against this major problem. …

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